I bought 2 year note for $100, and got discount of $10. So really, I paid $90 for $100 Note.
Now IRS says I need to pay tax on $10 discount. I received form 1099-B. They say long term capital gain. What???
Why must I do this?
Do I need to learn accounting? What form or forms should I use? Before it used to be simple, I show Interest on Schedule B.
You did not "get a discount" - you bought a bond for less than its face value, which is called buying "at a discount". So the analogy of buying milk "on sale" does not apply. It's not uncommon for bonds to be sold at a discount instead of paying a coupon, so the "discount" is treated as interest income.
The tax rules for discount bonds state that you can either treat the gain as interest income when the bond matures (or you sell it), or you may spread the discount over the life of the bond.
You are reading too much into the word "Discount" It has a different meaning when talkin about bonds than buying something at a store. Well, sort of. In this case it is just a way for them to price in your profit when you buy it.
The bottom line is that you are taxed on your profits regardless of what you paid for it. Assuming you sell the bond for the full face value your clearly have a profit, regardless of whether it is a discount, coupon, a gift, etc.
This would actually be true of anything you buy at a store with a discount IF you later sold it back at a higher price.
Whether it is a discount or they just paid a flat fee for holding the bond it all comes out the same.
