Accrued Market Discount treated as Capital Gain rather than ordinary income

[Jsando1973]

Can I hereby state that I am not making an election under IRC Section 1278(b) to include market discount as ordinary interest income. I further state that the accrued market discount realized upon the sale of the bonds listed below has been reflected in the calculation of capital gain on Form 8949 and Schedule D, and I am treating that amount as part of my long‑term capital gain for the year.

[baldietax · Accepted solution]

1278 election determines when you recognize the accrued income, annually or at disposal, you elect under 1278 to include the accrued AMD in your income "currently" i.e. every year.  You don't elect to "not" to do this and then it suddenly becomes a capital gain.  (And posting here doesn't help you with the IRS).

AMD is treated as ordinary income (to the extent of any capital gain).  If you sell the bond before maturity and your gain exceeds the AMD accrued to that point then you would recognize a gain for that difference, but the AMD portion of the gain will still be ordinary income.  At maturity by definition the entire AMD is ordinary income.

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

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 in-

come. 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. See Discounted Debt Instru-

ments, later.