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Discount on Short-Term Obligations: Investment Taxes (2025 IRS Guide)

This guide covers “Discount on Short-Term Obligations” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

A debt instrument, such as a bond, note, debenture, or other evidence of indebtedness, that bears no interest or bears interest at a lower than current market rate usually will be issued at less than its face amount. This discount is, in effect, additional interest income. The following are some types of discounted debt instruments.

  • U.S. Treasury bonds.

  • Corporate bonds.

  • Municipal bonds.

  • Certificates of deposit.

  • Notes between individuals.

  • Stripped bonds and coupons.

  • Collateralized debt obligations (CDOs).

Discount on Short-Term Obligations

When you buy a short-term obligation (one with a fixed maturity date of 1 year or less from the date of issue), other than a tax-exempt obligation, you generally can choose to include any discount and interest payable on the obligation in income currently. If you do not make this choice, the following rules generally apply.

Short-term obligations for which no choice is available.

You must include any discount or interest in current income as it accrues for any short-term obligation (other than a tax-exempt obligation) that is:

  • Held by an accrual-basis taxpayer;

  • Held primarily for sale to customers in the ordinary course of your trade or business;

  • Held by a bank, regulated investment company, or common trust fund;

  • Held by certain pass-through entities;

  • Identified as part of a hedging transaction; or

  • A stripped bond or stripped coupon held by the person who stripped the bond or coupon (or by any other person whose basis in the obligation is determined by reference to the basis in the hands of the person who stripped the bond or coupon).

Effect on basis.

Increase the basis of your obligation by the amount of discount you include in income currently.

Figuring the accrued discount.

Figure the accrued discount by using either the ratable accrual method or the constant yield method discussed in Accrued market discount, earlier.

Government obligations.

For an obligation described above that is a short-term government obligation, the amount you include in your income for the current year is the accrued acquisition discount, if any, plus any other accrued interest payable on the obligation. The acquisition discount is the stated redemption price at maturity minus your basis.

If you choose to use the constant yield method to figure accrued acquisition discount, treat the cost of acquiring the obligation as the issue price. If you choose to use this method, you cannot change your choice.

Nongovernment obligations.

For an obligation listed above that is not a government obligation, the amount you include in your income for the current year is the accrued OID, if any, plus any other accrued interest payable. If you choose the constant yield method to figure accrued OID, apply it by using the obligation's issue price.

Choosing to include accrued acquisition discount instead of OID.

You can choose to report accrued acquisition discount (defined earlier under Government obligations) rather than accrued OID on these short-term obligations. Your choice will apply to the year for which it is made and to all later years and cannot be changed without the consent of the IRS.

You must make your choice by the due date of your return, including extensions, for the first year for which you are making the choice. Attach a statement to your return or amended return indicating:

  • Your name, address, and social security number;

  • The choice you are making and that it is being made under section 1283(c)(2) of the Internal Revenue Code;

  • The period for which the choice is being made and the obligation to which it applies; and

  • Any other information necessary to show you are entitled to make this choice.

Choosing to include accrued discount and other interest in current income.

If you acquire short-term discount obligations that are not subject to the rules for current inclusion in income of the accrued discount or other interest, you can choose to have those rules apply. This choice applies to all short-term obligations you acquire during the year and in all later years. You cannot change this choice without the consent of the IRS.

The procedures to use in making this choice are the same as those described for choosing to include acquisition discount instead of OID on nongovernment obligations in current income. However, you should indicate that you are making the choice under section 1282(b)(2) of the Internal Revenue Code.

Also, see the following discussion. If you make the election to report all interest currently as OID, you must use the constant yield method.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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