7651 / How is original issue discount treated in the case of Treasury notes and bonds issued before July 2, 1982, and after December 31, 1954?
If the owner purchased the bond at a premium (i.e., at a price above the stated redemption price), no original issue discount is included in income on the sale or maturity of the obligation.3
If the obligation is sold or redeemed by a seller who did not buy at a premium and gain is realized, a part of the proceeds must be treated by the seller as ordinary income attributable to the original issue discount. The amount of discount treated as ordinary income is based on the proportionate part of the time from issue to the date of maturity that the seller held the obligation, and it is computed by multiplying the original issue discount by a fraction having as numerator the number of full months the obligation was held by the seller and as denominator the number of full months from the date of original issue to the stated date of maturity.4 Any days amounting to less than a full month are not counted.5
In determining how many months the seller held the obligation, he or she must include any period it was held by another person if the seller’s tax basis for determining gain or loss is the same, in whole or in part, as it would be in the hands of the other person.6