Sold zero-coupon Treasury bills before maturity

[TaillesQueries]

In 2023, we sold some zero-coupon Treasury bills prior to maturity. Since we sold them in the secondary market prior to maturity for more than we had paid for them, shouldn't the entire gain be classified as a short-term capital gain? For some reason, our 1099 says the entire gain is interest income. Is this accurate? Thanks. 

[maglib]

@TaillesQueries  The amount of your OID is considered interest income. Ordinary income.

 To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. 

If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. 

OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.

A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.

All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments.

The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). 

Discount on Short-Term Obligations

When you buy a short-term obligation (one with a fixed maturity date of 1 year or less from the date of issue), other than a tax-exempt obligation, you generally can choose to include any discount and interest payable on the obligation in income currently. If you do not make this choice, the following rules generally apply.

• You must treat any gain when you sell, exchange, or redeem the obligation as ordinary income, up to the amount of the ratable share of the discount.

For information about the sale of a debt instrument with OID, Original issue discount (OID) on debt instruments

[TaillesQueries]

@maglib Thanks, I appreciate the reply. So just to be clear:

• since these were short-term obligations (Treasury bills with terms of less than one year),

• and since I typically make no decision as to whether to include OID amortization as income in the current year (to be consistent, I usually wait until short-term zero-coupon bills mature before recognizing all gains as income),

• and since I sold them for less than par value,

therefore all gains should be treated as ordinary income. And for our purposes, ordinary income refers in this case to interest income reported on a Schedule B, rather than capital gains income reported on a Schedule D. By the way, this is consistent with the response from my broker that I just now received, which said that it is up to the client to determine how much is interest and how much is capital gains, but that the default for them is to report it all as interest. Does all of this sound correct? I just want to make sure that I understand it. Thanks again. 

[maglib]

@TaillesQueries So yes you can report it all as interest income as reported by broker as it is all ordinary income and simplest method.  

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