So unless I am missing something it appears we have two conflicting answers here:
tagteam said (referring to my original post here):
"Yes, if held to maturity (not sold) the difference between the discount and par would be interest."
But Mike9241 said (referring to another post but that post has the same fact pattern that my post is about):
"you have a US T-Note that had a maturity date more than 1 year after issuance. You have held it for more than 1 year if you hold to maturity. the gain will be long-term capital gain and is subject to both federal and state taxes, unless your state exempts gains on US securities, since that gain is no longer US interest income.
you probably will receive both a 1099-INT and a 1099-B"
So that means that the difference between the discounted purchase price and par at maturity is treated as a capital gain and NOT as interest.
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I am leaning towards 'Mike9241's answer being the correct one because of the citation he posted. I'm thinking that tagteam's answer is probably not right.
If true that's unfortunate because it means that if you buy a T-Note or T-Bond at a deep discount then most of your income from it will be subject to state tax.
Can anyone give a definitive confirmation of which answer is correct?
Also, are there really any states that would exempt the gain on a treasury security bought at a discount on the secondary market and held to maturity (other than states with no income tax of course!)? Sounds unlikely. But would be interested in knowing if there are.
