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| § |
The
price appreciation on original issue discount
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(OID)
bonds is an implicit interest payment.
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Hence
the IRS calculates a price appreciation and
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imputes
taxable interest income. Additional
gains
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or
losses due to market yield changes are treated
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as
capital gains.
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| § |
Example:
An 8% 30 yr. bond issued at 81.071% of
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par
is sold for 820.95 at the end of the year.
If
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interest
income is taxed at 36% and capital gains
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at
28%, the tax paid equals 0.36(80 + 811.80 -
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810.71)
+ 0.28(820.95-811.80) = $31.75.
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(YTM
at issue = 10%; yearend price using this
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YTM =
811.80)
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