Frequently Asked Questions
Who is eligible for the Tax-Exempt OID Basis Step-up?
Applies to holders of tax-exempt obligations issued with original issue discount.
How does the Tax-Exempt OID Basis Step-up work?
Original issue discount on tax-exempt obligations is treated as accruing for basis purposes, allowing the holder to increase their basis and reduce gain (or increase loss) upon sale.
What law authorizes the Tax-Exempt OID Basis Step-up?
The Tax-Exempt OID Basis Step-up is authorized under IRC §1288 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1288
Source: Internal Revenue Code, Title 26, United States Code
§ 1288. Treatment of original issue discount on tax-exempt obligations(a) General ruleOriginal issue discount on any tax-exempt obligation shall be treated as accruing—(1) for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (7) thereof), and
(2) for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (7) thereof).
(b) Definitions and special rulesFor purposes of this section—(1) Original issue discountThe term “original issue discount” has the meaning given to such term by section 1273(a) without regard to paragraph (3) thereof. In applying section 483 or 1274, under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation.
(2) Tax-exempt obligationThe term “tax-exempt obligation” has the meaning given to such term by section 1275(a)(3).
(3) Short-term obligationsIn applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply.
(Added Pub. L. 98–369, div. A, title I, § 41(a), July 18, 1984, 98 Stat. 553; amended Pub. L. 100–647, title I, § 1006(u)(3), Nov. 10, 1988, 102 Stat. 3427.)
Editorial Notes
Amendments1988—Subsec. (a). Pub. L. 100–647 substituted “paragraph (7)” for “paragraph (6)” in pars. (1) and (2).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective DateSection applicable to taxable years ending after July 18, 1984, and applicable to obligations issued after Sept. 3, 1982, and acquired after Mar. 1, 1984, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title.