US Code

Public Law 119-73 (01/23/2026)

26 U.S.C. § 1276

Disposition gain representing accrued market discount treated as ordinary income

(a)

Ordinary income

(1)

In general

Except as otherwise provided in this section, gain on the disposition of any market discount bond shall be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(2)

Dispositions other than sales, etc.

For purposes of paragraph (1), a person disposing of any market discount bond in any transaction other than a sale, exchange, or involuntary conversion shall be treated as realizing an amount equal to the fair market value of the bond.

(3)

Treatment of partial principal payments

(A)

In general

Any partial principal payment on a market discount bond shall be included in gross income as ordinary income to the extent such payment does not exceed the accrued market discount on such bond.

(B)

Adjustment

If subparagraph (A) applies to any partial principal payment on any market discount bond, for purposes of applying this section to any disposition of (or subsequent partial principal payment on) such bond, the amount of accrued market discount shall be reduced by the amount of such partial principal payment included in gross income under subparagraph (A).

(4)

Gain treated as interest for certain purposes

Except for purposes of sections 103, 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount treated as ordinary income under paragraph (1) or (3) shall be treated as interest for purposes of this title.

(b)

Accrued market discount

For purposes of this section—
(1)

Ratable accrual

Except as otherwise provided in this subsection or subsection (c), the accrued market discount on any bond shall be an amount which bears the same ratio to the market discount on such bond as—
(A)
the number of days which the taxpayer held the bond, bears to
(B)
the number of days after the date the taxpayer acquired the bond and up to (and including) the date of its maturity.
(2)

Election of accrual on basis of constant interest rate (in lieu of ratable accrual)

(A)

In general

At the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section 1272(a) (determined without regard to paragraph (2) thereof) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been—
(i)
originally issued on the date on which such bond was acquired by the taxpayer,
(ii)
for an issue price equal to the basis of the taxpayer in such bond immediately after its acquisition.
(B)

Coordination where bond has original issue discount

In the case of any bond having original issue discount, for purposes of applying subparagraph (A)—
(i)
the stated redemption price at maturity of such bond shall be treated as equal to its revised issue price, and
(ii)
the determination of the portion of the original issue discount which would have been includible in the gross income of the taxpayer under section 1272(a) shall be made under regulations prescribed by the Secretary.
(C)

Election irrevocable

An election under subparagraph (A), once made with respect to any bond, shall be irrevocable.

(3)

Special rule where partial principal payments

In the case of a bond the principal of which may be paid in 2 or more payments, the amount of accrued market discount shall be determined under regulations prescribed by the Secretary.

(c)

Treatment of nonrecognition transactions

Under regulations prescribed by the Secretary—
(1)

Transferred basis property

If a market discount bond is transferred in a nonrecognition transaction and such bond is transferred basis property in the hands of the transferee, for purposes of determining the amount of the accrued market discount with respect to the transferee—
(A)
the transferee shall be treated as having acquired the bond on the date on which it was acquired by the transferor for an amount equal to the basis of the transferor, and
(B)
proper adjustments shall be made for gain recognized by the transferor on such transfer (and for any original issue discount or market discount included in the gross income of the transferor).
(2)

Exchanged basis property

If any market discount bond is disposed of by the taxpayer in a nonrecognition transaction and paragraph (1) does not apply to such transaction, any accrued market discount determined with respect to the property disposed of to the extent not theretofore treated as ordinary income under subsection (a)—
(A)
shall be treated as accrued market discount with respect to the exchanged basis property received by the taxpayer in such transaction if such property is a market discount bond, and
(B)
shall be treated as ordinary income on the disposition of the exchanged basis property received by the taxpayer in such exchange if such property is not a market discount bond.
(3)

Paragraph (1) to apply to certain distributions by corporations or partnerships

For purposes of paragraph (1), if the basis of any market discount bond in the hands of a transferee is determined under section 732(a), or 732(b), such property shall be treated as transferred basis property in the hands of such transferee.

(d)

Special rules

Under regulations prescribed by the Secretary—
(1)
rules similar to the rules of subsection (b) of section 1245 shall apply for purposes of this section; except that—
(A)
paragraph (1) of such subsection shall not apply,
(B)
an exchange qualifying under section 354(a), 355(a), or 356(a) (determined without regard to subsection (a) of this section) shall be treated as an exchange described in paragraph (3) of such subsection, and
(C)
paragraph (3) of section 1245(b) shall be applied as if it did not contain a reference to section 351, and
(2)
appropriate adjustments shall be made to the basis of any property to reflect gain recognized under subsection (a).

Pub. L. 98–369, div. A, title I, § 41(a)98 Stat. 543Pub. L. 99–514, title VI, § 631(e)(15)100 Stat. 2275Pub. L. 100–647, title I, § 1018(u)(46)102 Stat. 3592Pub. L. 103–66, title XIII, § 13206(b)(1)(A)107 Stat. 465Pub. L. 115–141, div. U, title IV, § 401(a)(180)132 Stat. 1193(Added , , ; amended , title XVIII, §§ 1803(a)(5), (13)(A), 1899A(28), , , 2793, 2796, 2960; , , ; , (2)(B)(i), , ; , , .)

Editorial Notes

Amendments

Pub. L. 115–1412018—Subsec. (a)(4). substituted “871(a),” for “871(a),,”.

Pub. L. 103–66, § 13206(b)(2)(B)(i)1993—Subsec. (a)(4). , substituted “sections 103, 871(a),” for “sections 871(a)”.

Pub. L. 103–66, § 13206(b)(1)(A)Subsec. (e). , struck out heading and text of subsec. (e). Text read as follows: “This section shall not apply to any market discount bond issued on or before .”

Pub. L. 100–6471988—Subsec. (b)(3). designated paragraph relating to special rule where there are partial principal payments as par. (3) and inserted period at end.

Pub. L. 99–514, § 1803(a)(13)(A)(i)1986—Subsec. (a)(3). , added par. (3). Former par. (3) redesignated (4).

Pub. L. 99–514, § 1803(a)(13)(A)(i)Subsec. (a)(4). , (ii), redesignated par. (3) as (4) and substituted “under paragraph (1) or (3)” for “under paragraph (1)”.

Pub. L. 99–514, § 1803(a)(13)(A)(iii)Subsec. (b). , added undesignated par. at end relating to special rule where partial principal payments.

Pub. L. 99–514, § 631(e)(15)Subsec. (c)(3). , struck out reference to section 334(c).

Pub. L. 99–514, § 1803(a)(5)Subsec. (d)(1)(C). , added subpar. (C).

Pub. L. 99–514, § 1899A(28)Subsec. (e). , substituted “” for “the date of the enactment of this section”.

Statutory Notes and Related Subsidiaries

Effective Date of 1993 Amendment

Pub. L. 103–66, title XIII, § 13206(b)(3)107 Stat. 465

“The amendments made by this section [probably should be “subsection”, which amended this section and sections 1277 and 1278 of this title] shall apply to obligations purchased (within the meaning of section 1272(d)(1) of the Internal Revenue Code of 1986) after .”
, , , provided that:

Effective Date of 1988 Amendment

Pub. L. 100–647Pub. L. 99–514section 1019(a) of Pub. L. 100–647section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .

Effective Date of 1986 Amendment

section 631(e)(15) of Pub. L. 99–514section 338 of this titlesection 633 of Pub. L. 99–514section 336 of this titleAmendment by applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after , unless such corporation is completely liquidated before , any transaction described in for which the acquisition date occurs after , and any distribution, not in complete liquidation, made after , with exceptions and special and transitional rules, see , set out as an Effective Date note under .

section 1803(a)(5) of Pub. L. 99–514Pub. L. 98–369, div. Asection 1881 of Pub. L. 99–514section 48 of this titleAmendment by effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, , to which such amendment relates, see , set out as a note under .

Pub. L. 99–514, title XVIII, § 1803(a)(13)(C)100 Stat. 2797

section 1286 of this title“The amendments made by this paragraph [amending this section and ] shall apply to obligations acquired after the date of the enactment of this Act [].”
, , , provided that:

Effective Date

section 44 of Pub. L. 98–369section 1271 of this titleSection applicable to taxable years ending after , and applicable to obligations issued after , in taxable years ending after such date, see , set out as a note under .

Plan Amendments Not Required Until January 1, 1989

Pub. L. 99–514section 1140 of Pub. L. 99–514section 401 of this titleFor provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .