7637 / How is a convertible bond taxed on conversion?
Gain or loss is not recognized when, under the terms of a bond convertible into stock of the issuing corporation, the bond is exchanged for (converted into) that stock. This is true whether or not the fair market value of the stock exceeds the holder’s adjusted basis in the bond and any additional amount paid on exercise of the conversion right. The holder’s basis in the stock is the adjusted basis in the bond plus any amount paid on conversion.1 It is unclear whether the same tax treatment would apply upon the conversion of a bond convertible into another bond of the issuer.
The conversion of a bond (in accordance with its terms) into stock of a different corporation is a taxable event (see Q 7635).2
For the treatment of original issue discount (OID) in the case of a convertible bond, see Q 7638.