How Are Zero Coupon Bonds Taxed A zero coupon bond pays no coupon or interest payment Investors earn a return from zeros because they buy the bond at a discount to face value and then are paid the face value at the
Most zero coupon bonds are subject to capital gains taxes However since the interest isn t paid during the bond s life the IRS assesses taxes against imputed interest For example suppose you buy a zero coupon bond with a Tax Implications Despite the absence of periodic interest payments the imputed interest on zero coupon bonds is still taxable annually as it accrues under the original Issue discount OID rules This phantom income can create tax liabilities for investors even though no actual cash is received until maturity 2
How Are Zero Coupon Bonds Taxed
How Are Zero Coupon Bonds Taxed
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The tax rules for more unique debt instruments such as zero coupon bonds or Separate Trading of Registered Interest and Principal of Securities STRIPS aren t covered here We ll start with the information you ll need to determine how your bond proceeds will be taxed One last thing you should know about zero coupon bonds is the way they are taxed The difference between the discounted amount you pay for a zero coupon bond and the face amount you later receive is known as imputed interest
Zero coupon bonds are taxed differently from traditional bonds due to their lack of periodic interest payments In summary the tax treatment of zero coupon bond investments involves the taxation of accretion and imputed interest throughout the life of the bond Accretion is considered taxable income and is taxed annually while imputed interest is also subject to taxation
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Zero coupon bonds are issued by governments at discounts and they mature at par values where the amount of the spread is divided equally among the number of years to maturity Consequently Gains from zero coupon bonds known as imputed interest are generally taxed as ordinary income at the federal level even though investors do not receive cash payments until the bond matures State and local income tax treatment varies by jurisdiction
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A zero coupon bond pays no coupon or interest payment Investors earn a return from zeros because they buy the bond at a discount to face value and then are paid the face value at the
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Most zero coupon bonds are subject to capital gains taxes However since the interest isn t paid during the bond s life the IRS assesses taxes against imputed interest For example suppose you buy a zero coupon bond with a
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How Are Zero Coupon Bonds Taxed - Zero coupon bonds are taxed differently from traditional bonds due to their lack of periodic interest payments
