Support CenterHow do I enter Market Discount Interest - What do I do with a market discount interest.
The most accurate answer for your tax questions will be available via the IRS tax help, instructions for the specific source document that you received from the taxpayer and IRS publications.
Additional Information:
https://www.irs.gov/publications/p550 - This one is for 2019, but has great details about interest income and how to treat it
https://www.irs.gov/businesses/small-businesses-self-employed/cost-basis-reporting-faqs
7. What is market discount?
In general, market discount is the excess of (a) a debt instruments stated redemption price at maturity over (b) your basis in the debt instrument immediately after you acquire it. If a debt instrument also has OID, market discount is the excess of (a) the debt instruments adjusted issue price as of the day you acquire it, over (b) your basis in the debt instrument immediately after you acquire it. Although it arises as a result of a purchase at a discount, market discount is a form of interest that is includible in taxable income. 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 isnt 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, see Pub. 550 and Pub. 1212.
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