If one buys 30 year bonds directly from the treasury, I understand the semi-annual interests are taxable at federal level. But what about capital gains in case the bonds are purchased at a discount from the face value. How exactly are they taxed?

  • I'm not sure I understand - when buying bonds initially from Treasury at a discount, that is not a capital gain, that is simply your purchase price. The term 'discount' is perhaps a misnomer; the paid price is the fair value of the bond, but it is simply different from the face value ultimately redeemable due to the effective interest being earned over the lifetime of the bond. Feb 23, 2018 at 18:38
  • I meant the gain one will realize upon maturity (Difference between face value and purchase price).
    – Kannan
    Feb 23, 2018 at 18:50
  • The difference between the purchase price and the face value is the interest: treasurydirect.gov/indiv/research/indepth/tbills/res_tbill.htm
    – chepner
    Feb 23, 2018 at 20:19
  • You may be thinking of savings bonds, the accrued interest on which compounds semi-annually.
    – chepner
    Feb 23, 2018 at 20:29
  • 2
    @chepner bills are only up to one year, and are discount-only as you say. Marketable notes from 1 to 10 years and bonds over 10 years (currently only 30) do pay semiannual coupon (unless 'stripped'), and in addition may auction at discount or premium. See the navigation list at the left of the page you link. (But not savings bonds which are entirely different in spite of the similar word.) Feb 23, 2018 at 22:50

1 Answer 1


When any non-exempt bond (not just Treasuries) is bought at more than a 'de minimis' discount, the 'guaranteed' gain is treated for tax purposes as additional interest, amortized over the term of the bond (if more than one year). See the section Discount on Debt Instruments in chapter 1 of publication 550, downloadable in PDF or on the web (IDK why 2017 isn't up yet, but this provision hasn't changed recently). Although the actual computations are fairly complicated (see also pub 1212), if you hold the bond through a financial institution like a broker -- or TreasuryDirect, which is actually a fiscal agent, IIRC the Pittsburgh FRB -- they will do the computation and provide it to you and the IRS on Form 1099-OID during filing season, and you include it on Schedule B just like 'real' interest on 1099-INT. Marketable Treasuries in particular are book-entry only (since about 2000 IIRC) so you almost have to hold through some institution.

The 'de minimis' threshold is based on the bond's term, and for a 30-year bond is 7.5%; it looks to me like only a few recent 30-year auctions exceeded that (and both were reopenings, which you could simply avoid). Under the threshold you just report it as a capital gain at redemption or sale whichever comes first, in the usual fashion. I don't recall if TreasuryDirect issues you a 1099-B but if not this case is simple enough to do by hand (no transaction costs, no account costs, no margin, no basis adjustment, ...).

  • That was a clear explanation. Thanks a lot. To sum up, please check if I have understood correct. If discount from face value is over 7.5%, then 1) Treasury issues 1099 OID in addition to 1099 INT. Hence, along with the taxes on interrest rate, one has to pay additional taxes as per 1099 OID. 2) Upon redemption or sale, 1099 B may be issued. In such case, the purpose will be for IRS to verify the tax payments (both on interest and par value discount) over previous years.
    – Kannan
    Feb 24, 2018 at 7:28

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