You will pay tax to your state when the bond matures if you haven't done that each year. Review the information below to determine if you elected to include the interest in your income each year. Your basis remains the original discounted price if you do not report the market discount each year and at redemption the gain is reported as taxable gain (a redemption is a sale for tax purposes).
Although qualified stated interest received and OID accrued on a tax-exempt debt instrument are tax-exempt and not includible in income, market discount on a tax-exempt debt instrument isn’t tax-exempt interest and therefore is includible in taxable income.
8. When is market discount includible in income?
Unless you have made an election to include market discount in income as it accrues, you must treat any gain when you dispose of a debt instrument with market discount as interest income, up to the amount of the accrued market discount. In addition, you must treat any partial principal payment on a debt instrument with market discount as interest income, up to the amount of the accrued market discount. In general, market discount accrues over the term of a debt instrument on a ratable basis or, if you elect, on a constant yield basis.
For more information about market discount.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
