7672 / What is a zero coupon bond? How is the owner taxed?

Zero coupon bonds are obligations payable without interest at a fixed maturity date and issued at a deep discount. Maturities can range from short-term to long-term. For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q 7635 and Q 7650 to Q 7653.¹ In the case of a tax-exempt zero-coupon bond, the original issue discount is apportioned among holders as explained in Q 7651, but not included in income.²

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1.   Rev. Rul. 75-112, 1975-1 CB 274.

2.   Rev. Rul. 73-112, 1973-1 CB 47.

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