Appendix D
Computation of Tax Amortization of Original Issue Discount, Market Discount, and Premium

This appendix is nonauthoritative and is included for informational purposes only.

Amortization of Original Issue Discount

		Reporting of Amortization		Characterization of Amortization
	Method of Amortization	On a Daily Basis	At Disposition	Capital Gain	Interest Income
Taxable obligations:
Short term corporate obligations¹	SL²	X			X
Long term corporate obligations
Issued before 5/28/69	SL		X		X
Issued 5/28/69–7/1/82	SL	X			X
Issued after 7/1/82	YTM	X³			X
Short term government obligations¹	SL²	X			X
Long term government obligations
Issued before 7/2/82	SL		X		X
Issued after 7/1/82	YTM	X³			X
Tax-exempt obligations:
Short term obligations¹	SL²	X			X⁴
Long term obligations
Issued prior to 9/4/82 and acquired prior to 3/2/84	SL	X			X⁴
All other acquisitions	YTM	X			X⁴
SL = Straight line (ratable) YTM = Yield to maturity ¹ Short term is defined as having a maturity of not more than one year after the date of issue. ² An election may be made to use the yield-to-maturity method. ³ The accrual period with respect to which the original issue discount is computed and compounded is a one-year period for obligations issued before January 1, 1985, and is a six month period for obligations issued after December 31, 1984. ⁴ The amortization is characterized as tax-exempt interest.

Amortization of Market Discount

		Reporting of Amortization		Characterization of Amortization
	Method of Amortization	On a Daily Basis	At Disposition	Capital Gain	Interest Income
Taxable obligations:
Short term obligations¹
Government obligations	SL²	X			X
Corporate obligations	YTM³	X			X
Long term obligations
Issued after 7/18/84	SL²	⁴	X		X⁵
Issued before 7/19/84	N/A		X	X
Tax-exempt obligations:
Acquired on or before 4/30/93
Long term	N/A
Short term	N/A
Acquired after 4/30/93
Long term	SL²	⁴	X⁶		X⁶
Short term	N/A
SL = Straight line (ratable) YTM = Yield to maturity N/A = Not applicable ¹ Short term is defined as having a maturity of not more than one year after the date of issue. ² An election may be made to use the yield-to-maturity method. ³ An election may be made to use the straight-line method. ⁴ An election may be made to report amortization currently as interest. The election would apply to all market discount bonds acquired on or after the first day of the taxable year in which the election is made. ⁵ The amortization of the accrued discount is treated as interest income to the extent of the realized gain on disposition. ⁶ Market discount amortization represents taxable income.

Amortization of Premium

		Reporting of Amortization		Characterization of Amortization
	Method of Amortization	On a Daily Basis	At Disposition	Nondeductible Expense	Offset to Interest Income
Taxable obligations:
Obligations issued after 9/27/85
If election is made to amortize	YTM	¹
If no election is made to amortize	N/A⁵
Obligations issued before 9/28/85	³	¹	X		X²
Tax-exempt obligations:
Obligations issued after 9/27/85	YTM⁴	X			X
Obligations issued before 9/28/85	³	X		X
YTM = Yield to maturity N/A = Not applicable; no amortization needed ¹ An election is made to report amortization currently. Such will apply to all bonds held by the taxpayer at the beginning of the taxable year and to all bonds thereafter acquired by the taxpayer. ² For bonds acquired between October 23, 1986, and January 1, 1988, premium amortization is treated as interest expense. ³ Any reasonable method of amortization may be used. ⁴ The amortization should be computed by taking into account call dates and call prices. ⁵ Premium is part of the tax basis of security and affects tax gain or loss on the disposition or maturity of the obligation.

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