Frequently Asked Questions
Who is eligible for the De Minimis Market Discount Exclusion?
Applies automatically if the market discount is below the specified threshold (1/4 of 1 percent of the stated redemption price at maturity multiplied by the number of complete years to maturity).
How does the De Minimis Market Discount Exclusion work?
Treats market discount as zero if it is less than 0.25% of the redemption price multiplied by the years to maturity, effectively allowing the discount to be treated as capital gain rather than ordinary interest.
What law authorizes the De Minimis Market Discount Exclusion?
The De Minimis Market Discount Exclusion is authorized under IRC §1278(a)(2)(C) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1278
Source: Internal Revenue Code, Title 26, United States Code
§ 1278. Definitions and special rules(a) In generalFor purposes of this part—(1) Market discount bond(A) In generalExcept as provided in subparagraph (B), the term “market discount bond” means any bond having market discount.
(B) ExceptionsThe term “market discount bond” shall not include—(i) Short-term obligationsAny obligation with a fixed maturity date not exceeding 1 year from the date of issue.
(ii) United States savings bondsAny United States savings bond.
(iii) Installment obligationsAny installment obligation to which section 453B applies.
(C) Section 1277 not applicable to tax-exempt obligationsFor purposes of section 1277, the term “market discount bond” shall not include any tax-exempt obligation (as defined in section 1275(a)(3)).
(D) Treatment of bonds acquired at original issue(i) In generalExcept as otherwise provided in this subparagraph or in regulations, the term “market discount bond” shall not include any bond acquired by the taxpayer at its original issue.
(ii) Treatment of bonds acquired for less than issue priceClause (i) shall not apply to any bond if—(I) the basis of the taxpayer in such bond is determined under section 1012, and
(II) such basis is less than the issue price of such bond determined under subpart A of this part.
(iii) Bonds acquired in certain reorganizationsClause (i) shall not apply to any bond issued pursuant to a plan of reorganization (within the meaning of section 368(a)(1)) in exchange for another bond having market discount. Solely for purposes of section 1276, the preceding sentence shall not apply if such other bond was issued on or before July 18, 1984 (the date of the enactment of section 1276) and if the bond issued pursuant to such plan of reorganization has the same term and the same interest rate as such other bond had.
(iv) Treatment of certain transferred basis propertyFor purposes of clause (i), if the adjusted basis of any bond in the hands of the taxpayer is determined by reference to the adjusted basis of such bond in the hands of a person who acquired such bond at its original issue, such bond shall be treated as acquired by the taxpayer at its original issue.
(2) Market discount(A) In generalThe term “market discount” means the excess (if any) of—(i) the stated redemption price of the bond at maturity, over
(ii) the basis of such bond immediately after its acquisition by the taxpayer.
(B) Coordination where bond has original issue discountIn the case of any bond having original issue discount, for purposes of subparagraph (A), the stated redemption price of such bond at maturity shall be treated as equal to its revised issue price.
(C) De minimis ruleIf the market discount is less than ¼ of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero.
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