If you sold or redeemed a bond that had accrued market discount, you may need to report part of your gain as interest income rather than as a capital gain. The reporting process depends on how the accrued market discount is reported on your tax forms. In most cases, if your Form 1099-B shows an amount in Box 1f (Accrued Market Discount), you'll need to make entries in both the investment sales section and the interest income section of your return.
What Is Accrued Market Discount?
Market discount generally occurs when you purchase a bond for less than its stated redemption price or face value. As the bond approaches maturity, part of that discount may be treated as taxable interest income.
When the bond is sold, redeemed, or otherwise disposed of, the accrued market discount is typically reported as ordinary interest income rather than capital gain income.
Reporting a Form 1099-B With Accrued Market Discount in Box 1f
First, enter the bond sale as an investment transaction.
Go to:
- Federal
- Income (Select My Forms)
- Investments
- Stocks, Mutual Funds, Cryptocurrency, Collectibles, etc.
When entering the transaction:
- Enter the information from Form 1099-B.
- Use the worksheet provided in the Instructions for Form 8949 to calculate the adjustment amount.
- Enter the adjustment as a negative amount.
- Check the box indicating that Form 1099-B shows accrued market discount in Box 1f.
This adjustment reduces the amount reported as capital gain because a portion of the gain will instead be taxed as interest income.
Enter the Accrued Market Discount as Interest Income
After entering the Form 1099-B transaction, you'll also need to report the accrued market discount as interest income.
Go to:
- Federal
- Income (Select My Forms)
- 1099-INT, DIV, OID
- Did you earn any interest or dividend income from a bank, brokerage firm, or other financial institution?
- Select Add Interest Income (Form 1099-B)
- Enter the information from your Form 1099-B.
- Add the amount reported as accrued market discount to Line 1.
This ensures the amount is taxed correctly as interest income instead of being included in your capital gain calculation.
What If I Received a Partial Principal Payment?
If you received a partial payment of principal on a market discount bond:
- Do not use the market discount worksheet.
- Report the smaller of:
- The accrued market discount, or
- The amount of principal proceeds received
- Report the amount as interest income on your tax return.
This special rule applies because only part of the bond investment has been recovered.
What If the Bond Sale Is Subject to Wash Sale Rules?
If the sale of a market discount bond results in a loss that is subject to the wash sale rules, you must adjust the reported loss.
When entering the investment sale:
- Report the transaction in the investment section.
- Enter the nondeductible portion of the loss as a positive adjustment amount.
- Check the box:
- "Nondeductible Loss From a Wash Sale (W)"
The wash sale adjustment prevents you from deducting a loss when substantially identical securities were repurchased within the IRS wash sale period.
Why Are Two Entries Required?
Accrued market discount is unique because part of the transaction is treated as:
- Interest income, and
- Capital gain or loss
By entering both the Form 1099-B transaction and the interest income entry, the program correctly allocates the income according to IRS rules.