That amount is taxable to the seller, not you.
Short Sale The sale of a security not owned by the seller. Short sale orders are good for the day only and may be reviewed by a Fidelity representative to determine the availability of shares.
If the shares are not available, your order will be canceled. While the order is being reviewed, the order will remain in a Pending Open status. Short-Sale Commission Fidelity will charge a commission on both equity short sales and the buy to cover the equity short positions. Specific commissions charged will be based on the customer's stock commission rate. Short Sale Proceeds The total amount received from a short sale transaction.
Short-Term Investment An investment held for one year or less. For variable annuity VIP sector funds, this is a fund for which you have held units for less than 60 days. Short-Term Shares The number of shares that have been held less than the minimum holding period defined in a fund's prospectus.
Box The short selling of an asset you hold an equivalent or greater long position in. This may be accomplished by trading an equity or buying or writing options. Short-Term Trading Fee A fee you pay when you redeem, or sell, your shares. Not all funds charge short-term trading fees. Show All Events This is an indicator used with price charts. This indicator will place:.
When a company has released earnings greater than its earnings for the same period one year ago, BigCharts will display an upward pointing triangle. When the earnings are lower than the earnings for the same period one year ago, BigCharts will display a downward pointing triangle.
The pointing triangle feature is very helpful for viewing each company's earnings trend from quarter to quarter. No milestones will appear if your chart's primary security issued no earnings per share during the time period in question. Back Show Current Values Select this option to display Intraday changes in your brokerage account positions and a quote and market value for each of your positions. Show Dividends This indicator will place D milestones on your chart showing when your focus company or mutual fund issued a dividend.
Show Earnings This indicator will place E milestones on your chart showing when your focus company released their earnings per share to the market. Show Other Accounts After you select this option on the Portfolio screen, authorized accounts , accounts you are authorized to access, but do not own, display in addition to the accounts you do own. This option displays only on the Portfolio screen if you are authorized to access another person's accounts and have not yet chosen to display them.
Show Splits This indicator will display S milestones on your chart showing when your focus company issued a stock split. No milestones will appear if your chart's primary security issued no stock splits during the time period in question. Silver Pricing Silver Level pricing offers significant savings off of the Bronze Level commission schedule. To qualify, a household see Relationship Household must meet any of the following criteria:.
Since Inception Return calculation for the time period beginning when we added your account to the performance database and ended at the present date. Fidelity converted historical data through January in order to provide customers with multi-year and historical return information. If you account was opened prior to January , the Since Inception date for performance reporting is January 31, Single Tier A round lot or odd lot price is not available to this product.
Sink Defeased Termination of certain of the rights and interests of the bondholders and of their lien on the pledged revenues or other security in accordance with the terms of the bond contract for an issue of securities.
In some cases, particularly where the bond contract does not provide a procedure for termination of these rights, interests and lien other than through payment of all outstanding debt in full, funds deposited for future payment of the debt may make the pledged revenues available for other purposes without effecting a legal defeasance. Back Sinking Fund Amount The sinking fund amount refers to the amount of the issuance that will be redeemed as per the sinking fund provisions on or by a specified date.
The amount displayed appears as dollars in thousands or as a percent of the amount outstanding, and is labeled accordingly. Sinking Fund Date The sinking fund date is the date by which a given amount of the bond issue must be redeemed by the issuer. Sinking Fund Price The sinking fund price is the price, corresponding to a certain date, at which a given part of the bond issue could be redeemed by the issuer.
Note that the issuer may be able to meet its sinking fund commitments by purchasing the bonds on the open market at a price below the quoted price on the schedule. Sinking Fund Protection A sinking fund is a requirement included with certain bond issues, for part of the issue to be repaid on a regular basis before the stated maturity date of the bond.
The issuer typically buys back a stated amount of the issue on a specified date—often having the flexibility to buy back from bond holders at the pre-specified price usually par or at the prevailing market price, whichever is cheaper. Like a call feature, sinking fund payments might begin soon after the bond has been issued or they may be deferred for 10 or more years from the date of issue.
Consult the sinking fund schedule for this information. Unlike a call feature, however, if an issue has a sinking fund provision, it is a requirement, not an option, for the issuer to buy back the increments of the issue as stated. If you are considering the purchase of a bond with sinking fund features, be sure to consider but don't rely on , the fact that a portion of the bonds issued may be returned before the maturity date.
The issuer may either purchase the required amount from a small number of institutions or purchase them on the open market. In some situations, the presence of a sinking fund could be regarded as a positive feature of a bond. It could be perceived as an additional solvency hurdle for the issuer because the issuer must find the necessary funds to return some of the debt issue's principal before the stated maturity date of the bond.
Yet for this very reason sinking funds are frequently found on long-dated, lower quality issues. The presence of a sinking fund is not an added guarantee of an investment.
In extreme circumstances a bond may be falling in price and the issuer will be able to meet all of its sinking fund commitments by purchasing on the open market. The weaker an issuer becomes, the more likely the bond's price is to fall and the more likely sinking fund commitments can be met by open market purchases.
Sinking Fund Protection refers to a bond that does not have a sinking fund as part of its structure. On the Search Secondary Offerings page, the search criterion for Sinking Fund Protection defaults to Yes, which excludes bonds with a sinking fund feature. Selecting All will include bonds with sinking funds in your search returns.
Sinking Fund Schedule The sinking fund schedule shows the future dates at which sinking fund commitments come due. The schedule shows how much of the issue must be redeemed on or by the specified date. The specified price shows the price at which the issuer is committed to purchase the specified number of bonds from investors. In many cases, issuers may also meet their sinking fund commitments by buying the bonds on the open market--typically if the prevailing price is lower than the sinking fund price specified.
Thus, a sinking fund schedule is not a guarantee that an investor's holdings in an issue will be redeemed in proportion to the amounts listed on the schedule. Slow Stochastic The stochastic oscillator compares where a security's price closed relative to its price range over a given time period. As with moving average, the sensitivity increases with shorter time spans.
Two or more stochastics may be used with different time spans on a single chart to develop cross-over signals. This method is used to spot trend reversals with fairly good accuracy.
The stochastic indicator is plotted as two lines. The stochastic is plotted on a chart with values ranging from 0 to Readings above 80 are strong and indicate that price is closing near its high. Readings below 20 are strong and indicate that price is closing near its low. Small-Cap Stocks An investment categorization based on the market capitalization of a company.
Smart Payment Program Election Participation in the Smart Payment Program is voluntary, and shareholders must opt in to receive the estimated monthly payments shown. Social Security Tax Withheld For an executed order to exercise stock options, the total amount of social security tax withheld from the order's proceeds. Your employer is required to report taxable income and remit the tax withholding amounts to the appropriate regulatory agencies.
Sort By When searching for bonds, you can sort by highest yield, lowest yield, or medium yield. For example, if you sort by lowest yield for the selected minimum credit rating of A, the lowest-yielding bonds within the A rating tier appear first in the search results. Be aware that selecting highest yield or lowest yield does not necessarily return the highest or lowest yielding bonds for the rung, because the search tool first searches the central rung month to find bonds that meet your other selected criteria.
Bonds from the central rung month appear at the top of the list of eligible bonds. If there are no bonds in the central rung month, the search tool searches the two months on either side of the central rung month for the highest- or lowest-yielding bonds available. Sorting by medium yield generates the same sort order as highest yield, except higher-yielding outliers are removed from consideration to moderate risk.
Sort by Long-Term Shares For specific share trade requests, choose this option to have Fidelity sort your shares with Long Term holding period greater than one year first. Sort by Short-Term Shares For specific share trade requests, choose this option to have Fidelity sort your shares with a short term holding period one year or less first. Sort Direction You can view results of the multi-leg option tools in ascending or descending order i. Extended Hours quotes obtained from Fidelity.
For Premarket and After Hours session trade orders, the ask and bid price source is the ECN and Extended Hours Session displays as the source on trade order verification screens. The last trade price is either the standard market session or the Extended Hours session depending on the session during which the last trade for the security was executed.
If the Reg T requirement is not met, a Fed call is issued against the account. Back Special Optional Redemption Optional redemptions often can be exercised only on or after a specified date, typically for a municipal security beginning approximately ten years after the issue date.
Back Specific Shares You can choose specific tax lot shares for stock and option orders. The ability to choose specific shares is available for eligible accounts and valid order actions.
For stock orders, valid actions are Sell and Buy to Cover. For options orders, valid actions are Sell to Close and Buy to Close.
For tax assistance, consult your tax advisor regarding your particular situation. Specified Lot Detail This is an option in Order Details for orders where you have specified tax lots shares to trade. Select this option to display the tax lots and number of shares from each lot that will be sold when the order executes. The Specified Lot Detail option only displays in Order Details for orders where you specified tax lot shares to trade.
Specified Private Activity Bond Interest Specified Private Activity Bond Interest is interest paid by private activity bonds issued to encourage private-sector investment in the development of certain facilities which serve various specified public purposes and exempt interest dividends paid by mutual funds that are attributable to such interest.
The tax-exempt income reported by Fidelity includes amounts that are treated as specified private activity bond interest, if applicable. Specified private activity bond interest must be taken into account in computing the federal alternative minimum tax. Split Factor The multiplier used to adjust the number of shares you own when a stock splits. To place a spread order, you must have a Margin Agreement on file with Fidelity and be approved for option trading level 3 or higher.
Concerning stock option grants , this is the difference between a stock option's grant price and the fair market value for the underlying stock. Spread to Treasuries The difference in yield between the offered yield of the bond you are researching and the yield of its Treasury of similar maturity. Standard and Poor's Corporation An independent company that provides investors with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions.
Standard Deviation A statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a month period, and then annualizes the number.
Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility.
Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Standard Market Session for equities: ET, when over-the-counter markets are open for trading bond trading hours may vary based on marketplace participation. Standard Session As Of The date and time of the last trade of previous standard hours session.
Standard Session Quote The quote for a security as of the date and time displayed from the standard market session , 9: Eastern Time unless trading is halted. A Standard Session quote also displays in the Extended Hours quote pop-up window. When displayed in this window, the standard session quote for a stock is as of the market close. State This can refer to either the two-character abbreviation for the state where a driver's license was issued, provided during Fidelity Electronic Funds Transfer online setup; or a way to specify the state where bonds are issued when refining a search of municipal bond offerings.
For bond ladders, customers can search Fidelity's municipal bond offerings inventory by selecting the state where the bonds are issued to refine their search. Statements Receive different types of account or mutual fund prospectus information online, including the ability to:. State Tax Withheld After an order to exercise stock options executes, this is the total amount of state tax that is withheld from the order's proceeds. State Tax Withholding Estimated state taxes that would be withheld on a stock award at vesting.
State tax withholding laws on IRA distributions vary by state. When requesting an IRA distribution, this field displays state tax withholding information and options that are applicable for your state of legal residence.
For a Roth IRA, you have the option to elect not to have state tax withheld for all states except for those where state tax withholding does not apply. Your state of legal residence is determined by the legal address you have on file with Fidelity. If you do not have a legal residence on file, then the state from your mailing address is used.
Your state's tax regulations may require that Fidelity withhold state tax from your distribution if you have elected to have federal tax withheld.
When requesting an IRA distribution by selling all shares in a mutual fund position held in an eligible mutual fund account, the withholding amount is an estimate. The estimated state tax is based on the mutual fund's last available closing price and does not take into account any applicable fees. Status Status can mean the following:. Active - Deposit to Fidelity Only.
Inactive - Unavailable for Electronic Funds Transfer. Step Up See Coupon. Stochastic Oscillator Many systems that are developed use the stochastics as a timing indicator for signals of market reversal. The stochastic oscillator compares where a security's price has closed relative to the price range over a given time.
The stochastic oscillator is used in charting on our Web site. George Lane, who developed this indicator, theorized that in an upwardly trending market, prices tend to close near their high; and during a downward trending market, prices tend to close near their low.
Further, as an upward trend matures, price tends to close further away from its high; and as a downward trend matures, price tends to close away from its low. The stochastic indicator attempts to determine when prices start to cluster around their low of the day for an uptrending market, and when the tend to cluster around their high in a downtrending market. Lane's theory is these are the conditions which indicate a trend reversal is beginning to occur.
You can also refer to: Unlimited number of shares. Applies to online trades in all U. Equity short sales and purchases to cover an equity short position will be charged a commission according to the stock commission rate.
Additional fees may be charged on orders that require special handling. Commission schedules may vary for employee stock plan services transactions. Stock Appreciation Rights A stock appreciation right is a form of incentive or deferred compensation that ties part of your income to the performance of your company's stock.
It gives you the right to the monetary equivalent of the appreciation in the value of a specified number of shares over a specified period of time. Stock Appreciation Rights Account An account that is used to display stock appreciation rights that your employer gave to you as part of a stock appreciation rights grant.
Stock Compensation Plans This is a section of the Portfolio screen. This section displays when Fidelity Investments administratively services your employer's stock option plan or Employee Stock Purchase Plan. For a stock option plan, you can use the Select Action drop-down list to see information about your stock option grants and your stock option summary and history. You can also exercise stock options and view a list of exercise orders you placed during the current day.
For an Employee Stock Purchase Plan, you can use the Select Action drop-down list to see a summary or history of your participation, make a withdrawal, change your payroll deductions, or view estimates. Stock Option A stock option is the opportunity, granted to you by the issuer e. In general, there are three types of stock options: Stock Option Brokerage Account This is an account that is used to clear exercise orders for stock options your employer gave to you as part of a grant.
In this section, detailed information about a stock option grant displays e. Stock Option Plan A stock option is the opportunity, given by your employer, to purchase a certain number of shares of your company's common stock at a pre-established price the grant price. Employers may require a vesting period the period of time you must wait before you can exercise a stock option. In this section, option totals and current market values are shown for stock options across all of your stock option grants.
Stock Price This is the fair market value of a security. Stock Purchase Plan Companies offer employee stock purchase plans so that employees can share in the success of the firm. A stock purchase plan enables employees to purchase their company's common stock through payroll deduction, often at a discount from the market price. Certain stock purchase plans receive favorable tax treatment for example, employee stock purchase plans.
Stocks Securities that represent ownership and voting rights in a company. Also referred to as equities. Stock's Full Name and Symbol The ticker or exchange symbol used to identify the stock and the name of the stock's company.
Stock Split Increases the number of shares a shareholder owns. The total net value of the shares is usually the same after a stock split. Stock Swap This is a form of stock option exercise in which you exercise your option to acquire shares of your company stock by exchanging shares of a stock you currently own instead of cash to pay the exercise cost. It is important for investors to understand that company news or market conditions can have a significant impact on the price of a security.
This could result in a Stop Limit Order not being executed at all if the price of the security moves through your Stop Limit price. Also, as with most Limit orders, it is possible for your Stop Limit order to receive only a partial execution.
The market centers to which National Financial Services NFS routes Fidelity stop loss orders and stop limit orders may impose price limits such as price bands around the National Best Bid or Offer NBBO in order to prevent stop loss orders and stop limit orders from being triggered by potentially erroneous trades.
These price limits may vary by market center. For example, a stock is quoted at 85 Bid and A Sell Stop Limit order placed at 83 would generally be triggered when a transaction or print occurs at At that point, the order becomes a Limit order. The stock would have to trade at 83 again for your Sell Stop Limit order to be considered for execution at 83 or better. If the trigger price of 83 was reached and the stock did not trade at 83 again and continued to fall, the order would not even be considered for execution.
A Buy Stop Limit order placed at 87 would be triggered when a transaction or print occurs at The stock would have to trade at 87 again for your Buy Stop Limit order to be considered for execution at 87 or better. If the trigger price of 87 was reached and the stock did not trade at 87 again and continued to rise, the order would not even be considered for execution. Generally, a Stop Loss order automatically becomes a Market order when the stop price is reached.
Therefore, there is no guarantee that your order will be executed at the stop price. This could result in a Stop Loss Order being executed at a price that is dramatically different than what your Stop Loss price indicates.
A Sell Stop Loss order placed on an equity at 83 would be triggered when a transaction or print occurs at A Buy Stop Loss order placed on an equity at 87 would be triggered when a transaction or print occurs at Stop Orders Stop orders are generally used to protect a profit or to prevent further loss if the price of a security moves against you.
They can also be used to establish a position in a security if it reaches a certain price threshold or to close a short position. Buy stop loss and buy stop limit orders must be entered at a price which is above the current market price.
Sell stop loss and sell stop limit orders must be entered at a price which is below the current market price. If you file separate returns, you must each report one-half of any taxable distribution. If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. You and your spouse have a joint money market account.
Under state law, half the income from the account belongs to you, and half belongs to your spouse. If you file separate returns, you each report half the income.
Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property.
Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true.
The parents are not legally permitted to use any of the funds to support the child. For information on the penalty and any interest that applies, see Penalties in chapter 2. In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. It does not have to be entered in your passbook. Exceptions to this rule are discussed later. Interest income is generally reported to you on Form INT, or a similar statement, by banks, savings and loans, and other payers of interest.
This form shows you the interest you received during the year. Keep this form for your records. You do not have to attach it to your tax return. Report on your tax return the total interest income you receive for the tax year. See the Instructions for Form INT to see whether you need to adjust any of the amounts reported to you. Even if you do not receive a Form INT, you must still report all of your interest income.
For example, you may receive distributive shares of interest from partnerships or S corporations. Generally, if someone receives interest as a nominee for you, that person must give you a Form INT showing the interest received on your behalf. If you receive a Form INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later.
If you receive a Form INT that shows an incorrect amount or other incorrect information , you should ask the issuer for a corrected form. Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, , are not included in your taxable income.
However, see Information reporting requirement , next. Exempt-interest dividends should be shown in box 10 of Form DIV. You do not reduce your basis for distributions that are exempt-interest dividends. Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. This is an information reporting requirement and does not change the exempt-interest dividends into taxable income.
Exempt-interest dividends on specified private activity bonds may be subject to the alternative minimum tax. The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form DIV. See Form and its instructions for more information about this tax. Private activity bonds are discussed later. Interest on insurance dividends left on deposit with the Department of Veterans Affairs VA is not taxable.
Interest on a Roth IRA generally is not taxable. Interest on a traditional IRA is tax deferred. You generally do not include it in your income until you make withdrawals from the IRA. Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.
Certain distributions commonly called dividends are actually interest. You must report as interest so-called "dividends" on deposits or on share accounts in: The "dividends" will be shown as interest income on Form INT. Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends.
Generally, amounts you receive from money market funds should be reported as dividends, not as interest. If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account.
You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty.
The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings , later, for more information on how to report the interest and deduct the penalty.
The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income.
See Interest Expenses in chapter 3. If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. The value is determined by the cost to the financial institution. Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account.
However, if you can withdraw it only on the anniversary date of the policy or other specified date , the interest is taxable in the year that date occurs. Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw.
Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Generally, that interest is taxable when you receive it.
If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest.
Accumulated interest on an annuity contract you sell before its maturity date is taxable. Usurious interest is interest charged at an illegal rate.
This is taxable as interest unless state law automatically changes it to a payment on the principal. Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.
The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and. The amount you could have withdrawn as of the end of the year not reduced by any penalty for premature withdrawals of a time deposit. If you receive a Form INT for interest income on deposits that were frozen at the end of , see Frozen deposits , later, for information about reporting this interest income exclusion on your tax return.
The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it. If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond.
Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. If you make a below-market gift or demand loan, you must report as interest income any forgone interest defined later from that loan. The below-market loan rules and exceptions are described in this section.
For more information, see section of the Internal Revenue Code and its regulations. If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Certain loans made to qualified continuing care facilities under a continuing care contract. A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services.
A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement.
The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus. The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. A gift loan is any below-market loan where the forgone interest is in the nature of a gift. A demand loan is a loan payable in full at any time upon demand by the lender.
A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and.
An additional payment to the borrower in an amount equal to the forgone interest. The borrower is generally treated as transferring the additional payment back to the lender as interest. The lender must report that amount as interest income. The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction.
The borrower may have to report this payment as taxable income, depending on its classification. A term loan is any loan that is not a demand loan. A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower as a dividend, contribution to capital, etc. The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan.
An equal amount is treated as original issue discount OID. The lender must report the annual part of the OID as interest income. The borrower may be able to deduct the OID as interest expense. This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and. Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement.
This exception does not apply to a term loan described in 2 earlier that previously has been subject to the below-market loan rules.
Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year.
For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section h. Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender.
Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice;. Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public;. Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U.
Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. For a loan described in 6 above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower.
Some factors to be considered are:. If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. This section provides tax information on U.
It explains how to report the interest income on these bonds and how to treat transfers of these bonds. For information about U. Also go to www. If you use an accrual method of accounting, you must report interest on U.
You cannot postpone reporting interest until you receive it or until the bonds mature. If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. But see Reporting options for cash method taxpayers , later. These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account.
If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Series HH bonds were first offered in and last offered in August Before , Series H bonds were issued. Series H bonds are treated the same as Series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it. Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years.
The last Series H bonds matured in The last Series HH bonds will mature in Interest on these bonds is payable when you redeem the bonds.
The difference between the purchase price and the redemption value is taxable interest. Series EE bonds were first offered in January and have a maturity period of 30 years. Before July , Series E bonds were issued.
The original year maturity period of Series E bonds has been extended to 40 years for bonds issued before December and 30 years for bonds issued after November Paper Series EE bonds are issued at a discount. The face value is payable to you at maturity. Electronic Series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity. As of January 1, , paper savings bonds are no longer sold at financial institutions.
Owners of paper Series EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price with accrued interest. Series I bonds were first offered in These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years.
The face value plus all accrued interest is payable to you at maturity. If you use the cash method of reporting income, you can report the interest on Series EE, Series E, and Series I bonds in either of the following ways.
Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. However, see Savings bonds traded , later. Series EE bonds issued in matured in If you have used method 1, you generally must report the interest on these bonds on your return. The last Series E bonds were issued in and matured in If you used method 1, you generally should have reported the interest on these bonds on your return. Choose to report the increase in redemption value as interest each year.
If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program , later. If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS.
In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next.
To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. It includes the year of change both the beginning and ending dates. It identifies the savings bonds for which you are requesting this change. Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and.
Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.
You must attach this statement to your tax return for the year of change, which you must file by the due date including extensions. You can have an automatic extension of 6 months from the due date of your return for the year of change excluding extensions to file the statement with an amended return.
On the statement, type or print "Filed pursuant to section See also Revenue Procedure , Section 6. Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form In that case, follow the form instructions for an automatic change.
No user fee is required. If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form INT at the time of redemption and must provide you with another Form INT showing the amount of interest from the bond taxable to you.
The co-owner who redeemed the bond is a "nominee. If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid.
If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Pub. These rules are also shown in Table If the bonds are Series EE, Series E, or Series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year.
The choice to report the accrued interest each year can be made either by your child or by you for your child. This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year.
Either you or your child should keep a copy of this return. Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U.
However, see Tax on unearned income of certain children , earlier, under General Information. Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2. If you bought Series E, Series EE, or Series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported.
But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. This same rule applies when bonds other than bonds held as community property are transferred between spouses or incident to divorce. You bought Series EE bonds entirely with your own funds. You did not choose to report the accrued interest each year. Later, you transfer the bonds to your former spouse under a divorce agreement. You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer.
Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. If you and a co-owner each contributed funds to buy Series E, Series EE, or Series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported.
The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.
If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued.
The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. At that time neither you nor your spouse has to report the interest earned to the date of reissue. You both postponed reporting interest on the bond. You must report half the interest earned to the date of reissue. If you own Series E, Series EE, or Series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it.
However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. See Savings bonds traded , later. The manner of reporting interest income on Series E, Series EE, or Series I bonds, after the death of the owner decedent , depends on the accounting and income-reporting methods previously used by the decedent.
If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. The person who acquires the bonds includes in income only interest earned after the date of death. If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways.
The surviving spouse or personal representative executor, administrator, etc. The person who acquires the bonds then includes in income only interest earned after the date of death. If the choice in 1 is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return.
All interest earned both before and after the decedent's death except any part reported by the estate on its income tax return is income to the person who acquires the bonds. If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier.
In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. For more information on income in respect of a decedent, see Pub. You are a cash method taxpayer and do not choose to report the interest each year as it is earned. You were the beneficiary of these bonds. Your aunt used the cash method and did not choose to report the interest on the Series EE bonds each year as it accrued.
Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. The income in respect of the decedent is the sum of the unreported interest on the Series EE bonds and the interest, if any, payable on the Series HH bonds but not received as of the date of your aunt's death.
You must report any interest received during the year as income on your return. The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction.
For information on when to report the interest on the Series EE bonds traded, see Savings bonds traded , later. Savings bonds distributed from a retirement or profit-sharing plan. If you acquire a U. When you redeem the bond whether in the year of distribution or later , your interest income includes only the interest accrued after the bond was distributed. To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan , later.
If you postponed reporting the interest on your Series EE or Series E bonds, you did not recognize taxable income when you traded the bonds for Series HH or Series H bonds, unless you received cash in the trade. After August 31, , you cannot trade any other series of bonds for Series HH bonds. Any cash you received is income up to the amount of the interest earned on the bonds traded.
When your Series HH or Series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Your cost is the sum of the amount you paid for the traded Series EE or Series E bonds plus any amount you had to pay at the time of the trade.
You could have chosen to treat all of the previously unreported accrued interest on Series EE or Series E bonds traded for Series HH bonds as income in the year of the trade.
If you made this choice, it is treated as a change from method 1. See Change from method 1 , earlier. Box 3 of your Form INT should show the interest as the difference between the amount you received and the amount paid for the bond. However, your Form INT may show more interest than you have to include on your income tax return. For example, this may happen if any of the following are true. You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form INT will not be reduced by amounts previously included in income.
You received the bond from a decedent. The interest shown on your Form INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return.
Ownership of the bond was transferred. The interest shown on your Form INT will not be reduced by interest that accrued before the transfer. You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form INT will not be reduced by the amount you received as nominee for the other co-owner. See Co-owners , earlier, for more information about the reporting requirements.
You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. For more information on including the correct amount of interest on your return, see U.
Do not include this income on your state or local income tax return. You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. This exclusion is known as the Education Savings Bond Program. Use Form to figure your exclusion.
Attach the form to your Form or Form A. The bond must be issued either in your name sole owner or in your and your spouse's names co-owners. You must be at least 24 years old before the bond's issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased.
You can designate any individual including a child as a beneficiary of the bond. If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury.
Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent for whom you claim an exemption to attend an eligible educational institution. Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account.
For information about these programs, see Pub. Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.
Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Any tax-free payments other than gifts or inheritances received as educational assistance, such as: Any expense used in figuring the American Opportunity and lifetime learning credits. If the total proceeds interest and principal from the qualified U. If the proceeds are more than the expenses, you may be able to exclude only part of the interest.
To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator top part of the fraction is the qualified higher educational expenses you paid during the year. The denominator bottom part of the fraction is the total proceeds you received during the year. They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance.
Figuring the interest part of the proceeds Form , line 6. To figure the interest to report on Form , line 6, use the Line 6 Worksheet in the Form instructions. If you previously reported any interest from savings bonds cashed during , use the Alternate Line 6 Worksheet below instead. The interest exclusion is limited if your modified adjusted gross income modified AGI is: You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status.
Modified AGI, for purposes of this exclusion, is adjusted gross income Form , line 37, or Form A, line 21 figured before the interest exclusion, and modified by adding back any: Exclusion for adoption benefits received under an employer's adoption assistance program,.
If you claim any of the exclusion or deduction items listed above except items 6, 7, and 8 , add the amount of the exclusion or deduction except items 6, 7, and 8 to the amount on line 5 of the worksheet, and enter the total on Form , line 9, as your modified AGI. Because the deduction for interest expenses due to royalties and other investments is limited to your net investment income see Investment Interest in chapter 3 , you cannot figure the deduction for interest expenses until you have figured this exclusion of savings bond interest.
Therefore, if you had interest expenses due to royalties deductible on Schedule E Form , Supplemental Income and Loss, you must make a special computation of your deductible interest to figure the net royalty income included in your modified AGI.
You must figure deductible interest without regard to this exclusion of bond interest. You can use a "dummy" Form , Investment Interest Expense Deduction, to make the special computation. On this form, include in your net investment income your total interest income for the year from Series EE and I U. Use the deductible interest amount from this form only to figure the net royalty income included in your modified AGI. Do not attach this form to your tax return.
After you figure this interest exclusion, use a separate Form to figure your actual deduction for investment interest expenses and attach that form to your return. If you claim the interest exclusion, you must keep a written record of the qualified U. Your record must include the serial number, issue date, face value, and total redemption proceeds principal and interest of each bond. You can use Form to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year.
Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. You should receive Form INT showing the interest in box 3 paid to you for the year.
These bills generally have a 4-week, week, week, or week maturity period. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity. If you paid a premium for a bill more than face value , you generally report the premium as a section deduction when the bill is paid at maturity. See Discount on Short-Term Obligations , later.
If you reinvest your Treasury bill at its maturity in a new Treasury bill, note, or bond, you will receive payment for the difference between the proceeds of the maturing bill par amount less any tax withheld and the purchase price of the new Treasury security.
However, you must report the full amount of the interest income on each of your Treasury bills at the time it reaches maturity. Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Generally, you report this interest for the year paid. When the notes or bonds mature, you can redeem these securities for face value or use the proceeds from the maturing note or bond to reinvest in another note or bond of the same type and term.
If you do nothing, the proceeds from the maturing note or bond will be deposited in your bank account. Treasury notes and bonds are sold by auction. Two types of bids are accepted: If you make a competitive bid and a determination is made that the purchase price is less than the face value, you will receive a refund for the difference between the purchase price and the face value.
This amount is considered original issue discount. See De minimis OID , later. If the purchase price is determined to be more than the face amount, the difference is a premium. See Bond Premium Amortization in chapter 3. Or, on the Internet, visit www. These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. For the tax treatment of these securities, see Inflation-Indexed Debt Instruments , later.
For information on the retirement, sale, or redemption of U. Also see Nontaxable Trades in chapter 4 for information about trading U. Treasury obligations for certain other designated issues. If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale.
You must report that part of the sales price as interest income for the year of sale. If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond.
See Accrued interest on bonds , later in this chapter, for information on reporting the payment. Life insurance proceeds paid to you as the beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report part of each installment payment as interest income.
If you leave life insurance proceeds on deposit with an insurance company under an agreement to pay interest only, the interest paid to you is taxable. If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income.
Interest you receive on an obligation issued by a state or local government is generally not taxable. The issuer should be able to tell you whether the interest is taxable. The issuer should also give you a periodic or year-end statement showing the tax treatment of the obligation.
If you invested in the obligation through a trust, a fund, or other organization, that organization should give you this information. Even if interest on the obligation is not subject to income tax, you may have to report a capital gain or loss when you sell it. Estate, gift, or generation-skipping tax may apply to other dispositions of the obligation.
Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U. There are other requirements for tax-exempt bonds. Contact the issuing state or local government agency or see sections and through of the Internal Revenue Code and the related regulations.
Obligations that are not bonds. Interest on a state or local government obligation may be tax exempt even if the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax exempt. Also, interest paid by an insurer on default by the state or political subdivision may be tax exempt.
A bond issued after June 30, , generally must be in registered form for the interest to be tax exempt. Bonds issued after by an Indian tribal government including tribal economic development bonds issued after February 17, are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function.
However, the essential government function requirement does not apply to tribal economic development bonds issued after February 17, , for tax-exempt treatment.
Interest on private activity bonds other than certain bonds for tribal manufacturing facilities is taxable. Original issue discount OID on tax-exempt state or local government bonds is treated as tax-exempt interest.
For information on the treatment of OID when you dispose of a tax-exempt bond, see Tax-exempt state and local government bonds , later. For special rules that apply to stripped tax-exempt obligations, see Stripped Bonds and Coupons , later. If you must file a tax return, you are required to show any tax-exempt interest you received on your return.
This is an information reporting requirement only. It does not change tax-exempt interest to taxable interest. See Reporting tax-exempt interest , later in this chapter. Interest on federally guaranteed state or local obligations issued after is generally taxable. This rule does not apply to interest on obligations guaranteed by the following U. Federal home loan banks.
The guarantee must be made after July 30, , in connection with the original bond issue during the period beginning on July 30, , and ending on December 31, or a renewal or extension of a guarantee so made and the bank must meet safety and soundness requirements. Tax credit bonds generally do not pay interest. Instead, the bondholder is allowed an annual tax credit. The credit compensates the holder for lending money to the issuer and functions as interest paid on the bond.
Use Form , Credit to Holders of Tax Credit Bonds, to claim the credit for the following tax credit bonds and to figure the amount of the credit to report as interest income. The proceeds of these bonds are used to finance mortgage loans for homebuyers. Generally, interest on state or local government home mortgage bonds issued after April 24, , is taxable unless the bonds are qualified mortgage bonds or qualified veterans' mortgage bonds.
Interest on arbitrage bonds issued by state or local governments after October 9, , is taxable. An arbitrage bond is a bond any portion of the proceeds of which is expected to be used to buy or to replace funds used to buy higher yielding investments.
A bond is treated as an arbitrage bond if the issuer intentionally uses any part of the proceeds of the issue in this manner. Interest on a private activity bond that is not a qualified bond defined below is taxable. Generally, a private activity bond is part of a state or local government bond issue that meets both the following requirements.
Secured by an interest in property to be used for a private business use or payments for this property , or. Derived from payments for property or borrowed money used for a private business use. Interest on a private activity bond that is a qualified bond is tax exempt.
A qualified bond is an exempt-facility bond including an enterprise zone facility bond, a New York Liberty bond, a Midwestern disaster area bond, a Hurricane Ike disaster area bond, a Gulf Opportunity Zone bond treated as an exempt-facility bond, or any recovery zone facility bond issued after February 17, , and before January 1, , qualified student loan bond, qualified small issue bond including a tribal manufacturing facility bond , qualified redevelopment bond, qualified mortgage bond including a Gulf Opportunity Zone bond, a Midwestern disaster area bond, or a Hurricane Ike disaster area bond treated as a qualified mortgage bond , qualified veterans' mortgage bond, or qualified c 3 bond a bond issued for the benefit of certain tax-exempt organizations.
Interest you receive on these tax-exempt bonds, if issued after August 7, , generally is a "tax preference item" and may be subject to the alternative minimum tax. See Form and its instructions for more information.
The interest on the following bonds is not a tax preference item and is not subject to the alternative minimum tax. The interest on any qualified bond issued in or is not a tax preference item and is not subject to the alternative minimum tax. For this purpose, a refunding bond whether a current or advanced refunding is treated as issued on the date the refunded bond was issued or on the date the original bond was issued in the case of a series of refundings. However, this rule does not apply to any refunding bond issued to refund any qualified bond issued during through or after A portion of the interest on specified private activity bonds issued after December 31, , may be a tax preference item subject to the alternative minimum tax.
The tax preference status will apply to the portion of the interest that remains after reducing it by deductions that would be allowed if the interest were taxable.
Interest on certain private activity bonds issued by a state or local government to finance a facility used in an empowerment zone or enterprise community is tax exempt. New York Liberty bonds are bonds issued after March 9, , to finance the construction and rehabilitation of real property in the designated "Liberty Zone" of New York City. Interest on these bonds issued before is tax exempt. Market discount on a tax-exempt bond is not tax-exempt.
If you bought the bond after April 30, , you can choose to accrue the market discount over the period you own the bond and include it in your income currently as taxable interest. See Market Discount Bonds , later. If you do not make that choice, or if you bought the bond before May 1, , any gain from market discount is taxable when you dispose of the bond.
For more information on the treatment of market discount when you dispose of a tax-exempt bond, see Discounted Debt Instruments , later. A debt instrument, such as a bond, note, debenture, or other evidence of indebtedness, that bears no interest or bears interest at a lower than current market rate will usually be issued at less than its face amount. This discount is, in effect, additional interest income. The following are some types of discounted debt instruments. The discount on these instruments except municipal bonds is taxable in most instances.
The discount on municipal bonds generally is not taxable but see State or Local Government Obligations , earlier, for exceptions. OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.
All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments. The OID accrual rules generally do not apply to short-term obligations those with a fixed maturity date of 1 year or less from date of issue.
This small discount is known as "de minimis" OID. In the case of a debt instrument providing for more than one stated principal payment an installment obligation , the "de minimis" formula described above is modified. See Regulations section 1. If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules.
See Market Discount Bonds , later in this chapter. The OID rules discussed here do not apply to the following debt instruments. However, see Stripped tax-exempt obligations , later. Short-term debt instruments those with a fixed maturity date of not more than 1 year from the date of issue.
Avoiding any federal tax is not one of the principal purposes of the loan. It also will show, in box 2, the stated interest you must include in your income. Box 8 shows OID on a U. Treasury obligation for the part of the year you owned it and is not included in box 1.
Box 10 shows bond premium amortization. Do not file your copy with your return. Keep it for your records. In most cases, you must report the entire amount in boxes 1, 2, and 8 of Form OID as interest income.
If you receive a Form OID that includes amounts belonging to another person, see Nominee distributions , later. You bought the debt instrument after its original issue and paid a premium or an acquisition premium.
The debt instrument is a stripped bond or a stripped coupon including certain zero coupon instruments. See Figuring OID , later in this chapter. You bought a debt instrument at a premium if its adjusted basis immediately after purchase was greater than the total of all amounts payable on the instrument after the purchase date, other than qualified stated interest.
In general, this is stated interest unconditionally payable in cash or property other than debt instruments of the issuer at least annually at a fixed rate. You bought a debt instrument at an acquisition premium if both the following are true. The instrument's adjusted basis immediately after purchase including purchase at original issue was greater than its adjusted issue price. This is the issue price plus the OID previously accrued, minus any payment previously made on the instrument other than qualified stated interest.
Acquisition premium reduces the amount of OID includible in your income. If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form OID for that instrument.
Debt instruments issued after May 27, after July 1, , if a government instrument , and before If you hold these debt instruments as capital assets, you must include a part of the discount in your gross income each year that you own the instruments. Your basis in the instrument is increased by the amount of OID you include in your gross income. For these debt instruments, you report the total OID that applies each year regardless of whether you hold that debt instrument as a capital asset.
If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. This also applies to similar deposit arrangements with banks, building and loan associations, etc. CDs issued after generally must be in registered form. Bearer CDs are CDs not in registered form.