Market Discount of Municipal Bond

Home Fairmark Forum Taxation of Investments Market Discount of Municipal Bond

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  • #74553
    3plustitanium
    Participant

    If par redemption of a municipal bond realizes the gain of a market discount greater than the de minimus amount, is all of the gain taxable at the ordinary income rate, or only the amount of the gain in excess of the de minimus amount?

    #74554
    Kaye Thomas
    Moderator

    If market discount is de minimis you treat it as zero. If it is too large to be considered de minimis, the full amount is taxable as market discount.

    #74560
    3plustitanium
    Participant

    I thought that, if the market discount is less than the de minimus amount, it is still taxed, but at the capital gains rate. If market discount is more than the de minimus amount, it’s taxed as ordinary income. Is that not correct?

    #74573
    Kaye Thomas
    Moderator

    Essentially correct. There’s no specific rule taxing de minimis market discount as capital gain, but the discount means you have less basis when you report a sale or redemption. That means you’ll have taxable capital gain to the extent you recover this amount.

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