7628 / How is an investor taxed on gain or loss on the sale or maturity of a short-term taxable corporate obligation?

The share of original issue discount allocable to the taxpayer is the amount that bears the same ratio to the total discount as the number of days the obligation was held to the number of days after the issue date, up to and including the date of maturity of the obligation. An irrevocable election may be made, on an obligation-by-obligation basis, to determine the amount using daily compounding at a constant interest rate.³

Short-term corporate obligations are not subject to the market discount rules that require market discount to be treated as ordinary income on disposition.⁴ Therefore, any excess amount realized on sale after recovery of basis and original issue discount not previously included in income (see Q 7627) is treated as capital gain.⁵ See Q 699 regarding holding periods and Q 702 for the treatment of capital gains and losses.

If the taxpayer has a loss resulting from a sale to a related person (see Q 701), the loss may not be deducted or used to offset other capital gains.⁶

If “substantially identical” securities are acquired within 30 days before or 30 days after a sale that results in a loss, the loss deduction will be disallowed under the wash sale rules (see Q 7537), but the amount of loss disallowed is added to the basis of the new property.⁷

The installment method for reporting gain is not available for securities traded on an
established securities market. As a result, gain from sale is included in income for the year in which the trade date occurs even if one or more payments are received in the subsequent tax
year.⁸

Generally, neither gain nor loss is recognized on a transfer between spouses, or between former spouses if incident to divorce (see Q 789).⁹

Interest expenses and short sale expenses that were not deductible in the previous year because of the deferred taxability of the discount or interest (see Q 8045) are deductible in the year the obligation is sold or redeemed, whether at a gain or loss.¹⁰

If a corporate obligation was held as part of a tax straddle, the additional rules and qualifications explained in Q 7593 to Q 7614 apply. If a corporate obligation was held as part of a conversion transaction, the additional rules discussed in Q 7615 and Q 7616 apply.