Frequently Asked Questions
Who is eligible for the Constant Interest Rate Accrual Election?
Available to holders of market discount bonds; often results in slower discount accrual and deferred ordinary income recognition compared to ratable accrual.
How does the Constant Interest Rate Accrual Election work?
Taxpayers can elect to accrue market discount using a constant interest rate method instead of the default ratable (linear) accrual method.
What law authorizes the Constant Interest Rate Accrual Election?
The Constant Interest Rate Accrual Election is authorized under IRC §1276(b)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1276
Source: Internal Revenue Code, Title 26, United States Code
§ 1276. Disposition gain representing accrued market discount treated as ordinary income(a) Ordinary income(1) In generalExcept as otherwise provided in this section, gain on the disposition of any market discount bond shall be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Dispositions other than sales, etc.For purposes of paragraph (1), a person disposing of any market discount bond in any transaction other than a sale, exchange, or involuntary conversion shall be treated as realizing an amount equal to the fair market value of the bond.
(3) Treatment of partial principal payments(A) In generalAny partial principal payment on a market discount bond shall be included in gross income as ordinary income to the extent such payment does not exceed the accrued market discount on such bond.
(B) AdjustmentIf subparagraph (A) applies to any partial principal payment on any market discount bond, for purposes of applying this section to any disposition of (or subsequent partial principal payment on) such bond, the amount of accrued market discount shall be reduced by the amount of such partial principal payment included in gross income under subparagraph (A).
(4) Gain treated as interest for certain purposesExcept for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount treated as ordinary income under paragraph (1) or (3) shall be treated as interest for purposes of this title.
(b) Accrued market discountFor purposes of this section—(1) Ratable accrualExcept as otherwise provided in this subsection or subsection (c), the accrued market discount on any bond shall be an amount which bears the same ratio to the market discount on such bond as—(A) the number of days which the taxpayer held the bond, bears to
(B) the number of days after the date the taxpayer acquired the bond and up to (and including) the date of its maturity.
(2) Election of accrual on basis of constant interest rate (in lieu of ratable accrual)(A) In generalAt the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section 1272(a) (determined without regard to paragraph (2) thereof) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been—(i) originally issued on the date on which such bond was acquired by the taxpayer,
(ii) for an issue price equal to the basis of the taxpayer in such bond immediately after its acquisition.
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