7634 / What amounts are included in current income by an investor who holds a taxable corporate bond?

(1) Interest that accrues after the date of purchase is included as ordinary income in the year in which it is received or made available.¹ As a general rule, interest is considered received on the date the interest check is received, if the bond is registered, or on the date the coupon matures, in the case of a bearer coupon bond.² (See Q 662 for an explanation of the doctrine of constructive receipt.) If the investor purchased the bond between interest dates and the investor paid the seller interest accrued but not yet due at that time, he or she receives that amount as a tax-free return of capital out of the first interest payment received. The investor includes in income only the balance of the interest.³ If principal or interest was in default at the time of purchase and the bond traded without allocation of price between principal and accrued interest, see Q 7671.

(2) If the holder purchased the bond at a premium, he or she may elect to amortize a part of the premium each year and reduce basis by the amount deductible (or applied to reduce interest payments) (see Q 7654).

(3) Unless the bondholder purchased the bond at a premium (i.e., at an amount in excess of the face value of the bond), the holder of a bond originally issued at a discount after May 27, 1969, must include in income a portion of the original issue discount (OID). However, if the discount at issue was less than ¼ of 1 percent (.0025) of the stated redemption price multiplied by the number of full years from the date of original issue to maturity, the bond is treated as if it were not issued at a discount and no part of the discount is included in income as it accrues.⁴ OID on bonds issued after May 27, 1969, and on or before July 1, 1982, accrues as discussed in Q 7652.OID on bonds issued after July 1, 1982, accrues as discussed in Q 7650.

(4) If the bond was issued after July 18, 1984, or if the bond was issued on or before July 18, 1984, and was purchased after April 30, 1993, and the purchase occurred on the market at a discount of ¼ of 1 percent (.0025) or more of the stated redemption price at maturity multiplied by the number of years until maturity, a cash basis investor must include the market discount in income as it accrues if he or she has made an election to include accrued market discount with respect to that bond or other market discount obligations, as discussed in Q 7644.⁵