ExpertHard1 markMultiple Choice
CPA · Question 70 · Area IV: Individual Taxation
A taxpayer purchased a bond for $900 (face value $1,000) in the secondary market. The bond has $100 of market discount. The taxpayer does NOT elect to include market discount in income currently. Two years later, the taxpayer sells the bond for $950. At the time of sale, accrued market discount is $30. What is the character of the $50 gain?
A taxpayer purchased a bond for $900 (face value $1,000) in the secondary market. The bond has $100 of market discount. The taxpayer does NOT elect to include market discount in income currently. Two years later, the taxpayer sells the bond for $950. At the time of sale, accrued market discount is $30. What is the character of the $50 gain?
Answer options:
A.
$50 capital gain.
B.
$50 ordinary income.
C.
$30 ordinary income and $20 capital gain.
D.
$20 ordinary income and $30 capital gain.
How to approach this question
Rule: Gain on market discount bond is Ordinary to extent of accrued discount. Remainder is Capital.
Full Answer
C.$30 ordinary income and $20 capital gain.✓ Correct
Under the market discount rules, gain on the disposition of a market discount bond is treated as ordinary income (interest) to the extent of the accrued market discount. Accrued discount = $30. Total Gain = $950 - $900 = $50. Therefore, $30 is ordinary income, and the remaining $20 is capital gain.
Common mistakes
Treating the entire gain as capital.
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