§1281 Current inclusion in income of discount on certain short-term obligations

Summary

You must include each year in your taxable income a daily share of any discount you earned on certain short-term debt you held. You count the discount for each day you owned the debt during the year. You also must report any interest as it accrues, unless that interest was already counted as part of the discount. The rule applies to short-term obligations held by people using an accrual accounting method, held mainly for sale in a business, held by banks, by regulated investment companies or common trust funds, marked as part of a hedge under section 1256(e)(2), or to stripped bonds or coupons held by the person who stripped them (or by someone whose cost is based on that person). It also covers obligations held by pass‑thru entities set up to avoid the rule or acquired during a “required accrual period.” The required accrual period starts when, for at least 90 days in a year, 20% or more of the entity’s interests are owned by the listed holders or by other covered pass‑thru entities. A pass‑thru entity means a partnership, S corporation, trust, or similar entity. Special limits for original issue discount on nongovernmental obligations are in section 1283(c).