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