Bonds Interest Rate

Do I pay federal income tax on my zero bonds the year I cash them in?

I have several taxable zero bonds that I cashed in this year, worth around 12,000, will I have to pay federal/state income tax on all of that money?

Public Comments

1. No, you don't pay tax on the redemption amount, but on the excess of the redemption amount over the purchase price. You should receive a form 1099-OID from the issuer or your broker which will tell you what to report as income. "Purchaser of stripped bonds or coupons: If you purchase a stripped bond or coupon, treat it as if it were originally issued on the date of purchase. If you purchase the stripped bond, treat as OID any excess of the stated redemption price at maturity over your purchase price. If you purchase the stripped coupon, treat as OID any excess of the amount payable on the due date of the coupon over your purchase price." See the following info from IRS Publication 1212:
2. Zero coupon bonds are considered to be OID (original issue discount) bonds. Except for short-term securities, you include OID interest in your income as it accrues over the term of the bond even if you don't actually receive any interest payments. In other words, you should have been paying taxes each year since you bought the bonds unless you bought them this year. You should receive a Form 1099-OID showing the taxable amount. If the face value of the bonds is $12,000, you don't pay tax on the entire amount. You only pay it on the interest received (difference between value at issue or purchase and the value at maturity or sale).