7646 / Does a donor include accrued market discount in income when making a gift of a market discount bond?

When a taxpayer makes a gift of a taxable bond issued after July 18, 1984, or a taxable bond issued on or before July 18, 1984, and purchased after April 30, 1993, or a tax-exempt bond purchased after April 30, 1993, any of which the taxpayer acquired at a market discount and that has appreciated in value at the time of the gift, he or she must include in gross income an amount equal to the market discount accrued to the date of the gift, but limited to the amount of gain that would have been realized had the taxpayer received fair market value on making the gift.¹ The amount is treated as interest income (but not for withholding at the source).² Discount is considered to have accrued on a ratable basis, or, if the taxpayer elects (irrevocably), at a constant interest rate, just as if he or she had sold the bond (see Q 7645). Had the taxpayer previously elected to include market discount in gross income as it accrued (see Q 7644), no accrued discount would be includable as a result of the gift.³

If a bond was issued on or before July 18, 1984, and purchased before May 1, 1993, or if the bond is a tax-exempt issue purchased before May 1, 1993, no accrued market discount is included in income.⁴

---

1.   IRC § 1276.

2.   General Explanation–TRA ’84, p. 94.

3.   IRC § 1278(b).