Capital gain on redemption of treasury note?

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On treasury notes purchased on the open market at a discount, at redemption the entire gain (accrued market discount) has historically been taxed as interest. On four of my 25 individual treasury redemptions in 2025, my broker reported the gain on its year end tax reporting statement as a capital gain, not interest. I checked with my broker and was told only that "something" in the calculation of such taxes has changed at the federal level (OBBB?). I have searched the internet for confirmation of such a change in the tax law but can find none. Should I file my tax return counting all these treasury gains as interest as in previous years or follow my broker's advice and consider some as a capital gain this year?

Not A Product Question

Mike9241Answer

Level 15

I believe your broker is wrong. This is from PUB 550. 2024 version, but nothing changed in 2025

Market Discount Bonds
A market discount bond is any bond having market discount except:
• Short-term obligations (those with fixed maturity dates
of up to 1 year from the date of issue),
• Tax-exempt obligations you bought before May 1, 1993,
• U.S. savings bonds, and
• Certain installment obligations.
Market discount arises when the value of a debt obligation decreases after its issue date. Generally, this is due to an increase in interest rates. If you buy a bond on the secondary market, it may have market discount.
When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply.
• You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the
accrued market discount.
• You must treat any partial payment of principal on the bond as ordinary interest income, up to the amount of
the accrued market discount.

• If you borrow money to buy or carry the bond, your deduction for interest paid on the debt is limited. later.
Market discount. Market discount is the amount of the stated redemption price of a bond at maturity that is more than your basis in the bond immediately after you acquire it. You treat market discount as zero if it is less than one-fourth of 1% (0.0025) of the stated redemption price of the bond multiplied by the number of full years to maturity (after you acquire the bond). If a market discount bond also has OID, the market discount is the sum of the bond's issue price and the total OID includible in the gross income of all holders (for a
tax-exempt bond, the total OID that accrued) before you acquired the bond, reduced by your basis in the bond immediately after you acquired it. Bonds acquired at original issue. Generally, a bond
you acquired at original issue is not a market discount bond. If your adjusted basis in a bond is determined by
reference to the adjusted basis of another person who acquired the bond at original issue, you also are considered to have acquired it at original issue.

https://www.irs.gov/pub/irs-pdf/p550.pdf

Mike9241

Answer

Level 15

I believe your broker is wrong. This is from PUB 550. 2024 version, but nothing changed in 2025

Market Discount Bonds
A market discount bond is any bond having market discount except:
• Short-term obligations (those with fixed maturity dates
of up to 1 year from the date of issue),
• Tax-exempt obligations you bought before May 1, 1993,
• U.S. savings bonds, and
• Certain installment obligations.
Market discount arises when the value of a debt obligation decreases after its issue date. Generally, this is due to an increase in interest rates. If you buy a bond on the secondary market, it may have market discount.
When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply.
• You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the
accrued market discount.
• You must treat any partial payment of principal on the bond as ordinary interest income, up to the amount of
the accrued market discount.

• If you borrow money to buy or carry the bond, your deduction for interest paid on the debt is limited. later.
Market discount. Market discount is the amount of the stated redemption price of a bond at maturity that is more than your basis in the bond immediately after you acquire it. You treat market discount as zero if it is less than one-fourth of 1% (0.0025) of the stated redemption price of the bond multiplied by the number of full years to maturity (after you acquire the bond). If a market discount bond also has OID, the market discount is the sum of the bond's issue price and the total OID includible in the gross income of all holders (for a
tax-exempt bond, the total OID that accrued) before you acquired the bond, reduced by your basis in the bond immediately after you acquired it. Bonds acquired at original issue. Generally, a bond
you acquired at original issue is not a market discount bond. If your adjusted basis in a bond is determined by
reference to the adjusted basis of another person who acquired the bond at original issue, you also are considered to have acquired it at original issue.

https://www.irs.gov/pub/irs-pdf/p550.pdf

Mike9241

J

Jim HAuthor

Level 2

Mike 9241's reply and the tax rules cited support my contention that all the proceeds received on redemption of a treasury note should be considered as interest, not a capital gain. I still cannot understand why my (major) brokerage firm incorrectly counted some of my 2025 treasury note redemptions as capital gains. Now I have to decide if I will use the erroneous capital gain numbers on my tax return (versus converting them to interest) so there is no discrepancy between my return and the numbers submitted to the IRS by my brokerage firm.

Mike9241

Level 15

@Jim H Did you contact your FI and ask for their reasoning for treating the difference as capital gain when the PUB states it should be interest income?

Mike9241