What is a market discount?

Market discount generally refers to the difference between the price you paid for a bond or other debt instrument (your basis) and its redemption value at maturity. This discount is treated as interest income for tax purposes.

If you purchase a bond at a discount, you'll realize a profit when it matures. You can choose one of two methods for taxing this profit:

• Pay tax on the entire discount when you sell or redeem the bond, or
• Spread the taxable amount over the life of the bond (or the period you own it).