Title 26 — Internal Revenue CodeRelease 119-73
§1286 Tax treatment of stripped bonds
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter P— - Capital Gains and Losses › Part PART V— - SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS › Subpart Subpart D— - Miscellaneous Provisions › § 1286
Summary
Treats a separated bond or coupon as if it were a new discount bond bought on the date you buy it. The discount equals what will be paid at maturity (or what the coupon will pay) minus the share of the purchase price. If you take coupons off a bond and then sell either the bond or a coupon, you must report any interest that built up while you owned it and any market discount that built up and wasn’t already taxed. You then raise the bond’s and coupons’ tax bases by the amounts you reported. Before you sell, you split the adjusted basis between the parts you keep and the parts you sell based on their fair market values. For tax-exempt bonds, the discount is split into a tax-free part and a taxable part, the rule about reporting accrued interest does not apply, and the basis is increased by unpaid accrued interest plus any accrued market discount that you include in income. Definitions (one line each): bond = loan paper like a note or certificate; stripped bond = bond whose interest coupons are owned separately; stripped coupon = an interest coupon from a stripped bond; stated redemption price at maturity = the amount payable at the end; coupon = right to receive interest; purchase = buying as defined for tax purposes. The tax agency can make rules to treat similar accounts like this and can change the rules when special features make the basic rule unfair.
Full Legal Text
Title 26, §1286
Internal Revenue Code — Source: USLM XML via OLRC
(a)If any person purchases a stripped bond or a stripped coupon, then such bond or coupon while held by such purchaser (or by any other person whose basis is determined by reference to the basis in the hands of such purchaser) shall be treated for purposes of this part as a bond originally issued on the purchase date and having an original issue discount equal to the excess (if any) of—
(1)the stated redemption price at maturity (or, in the case of coupon, the amount payable on the due date of such coupon), over
(2)such bond’s or coupon’s ratable share of the purchase price.
(b)For purposes of this subtitle, if any person strips 1 or more coupons from a bond and disposes of the bond or such coupon—
(1)such person shall include in gross income an amount equal to the sum of—
(A)the interest accrued on such bond while held by such person and before the time such coupon or bond was disposed of (to the extent such interest has not theretofore been included in such person’s gross income), and
(B)the accrued market discount on such bond determined as of the time such coupon or bond was disposed of (to the extent such discount has not theretofore been included in such person’s gross income),
(2)the basis of the bond and coupons shall be increased by the amount included in gross income under paragraph (1),
(3)the basis of the bond and coupons immediately before the disposition (as adjusted pursuant to paragraph (2)) shall be allocated among the items retained by such person and the items disposed of by such person on the basis of their respective fair market values, and
(4)for purposes of subsection (a), such person shall be treated as having purchased on the date of such disposition each such item which he retains for an amount equal to the basis allocated to such item under paragraph (3).
(c)(1)In the case of any tax-exempt obligation (as defined in section 1275(a)(3)) from which 1 or more coupons have been stripped—
(A)the amount of the original issue discount determined under subsection (a) with respect to any stripped bond or stripped coupon—
(i)shall be treated as original issue discount on a tax-exempt obligation to the extent such discount does not exceed the tax-exempt portion of such discount, and
(ii)shall be treated as original issue discount on an obligation which is not a tax-exempt obligation to the extent such discount exceeds the tax-exempt portion of such discount,
(B)subsection (b)(1)(A) shall not apply, and
(C)subsection (b)(2) shall be applied by increasing the basis of the bond or coupon by the sum of—
(i)the interest accrued but not paid before such bond or coupon was disposed of (and not previously reflected in basis), plus
(ii)the amount included in gross income under subsection (b)(1)(B).
(2)For purposes of paragraph (1), the tax-exempt portion of the original issue discount determined under subsection (a) is the excess of—
(A)the amount referred to in subsection (a)(1), over
(B)an issue price which would produce a yield to maturity as of the purchase date equal to the lower of—
(i)the coupon rate of interest on the obligation from which the coupons were separated, or
(ii)the yield to maturity (on the basis of the purchase price) of the stripped obligation or coupon.
(d)For purposes of this section—
(1)The term “bond” means a bond, debenture, note, or certificate or other evidence of indebtedness.
(2)The term “stripped bond” means a bond issued at any time with interest coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable.
(3)The term “stripped coupon” means any coupon relating to a stripped bond.
(4)The term “stated redemption price at maturity” has the meaning given such term by section 1273(a)(2).
(5)The term “coupon” includes any right to receive interest on a bond (whether or not evidenced by a coupon).
(6)The term “purchase” has the meaning given such term by section 1272(d)(1).11 See References in Text note below.
(e)In the case of an account or entity substantially all of the assets of which consist of bonds, preferred stock, or a combination thereof, the Secretary may by regulations provide that rules similar to the rules of this section and section 305(e), as appropriate, shall apply to interests in such account or entity to which (but for this subsection) this section or section 305(e), as the case may be, would not apply.
(f)The Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, or other circumstances, the tax treatment under this section does not accurately reflect the income of the holder of a stripped coupon or stripped bond, or of the person disposing of such bond or coupon, as the case may be, for any period, such treatment shall be modified to require that the proper amount of income be included for such period.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 1272(d), referred to in subsec. (d)(6), was redesignated section 1272(c) by Pub. L. 115–141, div. U, title IV, § 401(c)(1)(B), Mar. 23, 2018, 132 Stat. 1205.
Amendments
2018—Subsec. (a). Pub. L. 115–141, § 401(c)(2)(B), struck out “after
July 1, 1982,” before “a stripped bond” in introductory provisions. Subsec. (b). Pub. L. 115–141, § 401(c)(2)(B), struck out “after
July 1, 1982,” before “disposes of the bond” in introductory provisions. Subsec. (c). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (d) as (c) and struck out former subsec. (c) which related to retention of existing law for stripped bonds purchased before
July 2, 1982. Subsec. (d). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (e) as (d). Former subsec. (d) redesignated (c). Subsec. (d)(5). Pub. L. 115–141, § 401(c)(2)(C), struck out at end “This paragraph shall apply for purposes of subsection (c) only in the case of purchases after
July 1, 1982.” Subsec. (e). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (f) as (e). Former subsec. (e) redesignated (d). Subsec. (f). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (g) as (f). Former subsec. (f) redesignated (e). Pub. L. 115–141, § 401(a)(182), substituted “and section 305(e),” for “and 305(e),”. Subsec. (g). Pub. L. 115–141, § 401(c)(2)(A), redesignated subsec. (g) as (f). 2004—Subsecs. (f), (g). Pub. L. 108–357 added subsec. (f) and redesignated former subsec. (f) as (g). 1988—Subsec. (d). Pub. L. 100–647 amended subsec. (d) generally. Prior to amendment, subsec. (d) read as follows: “In the case of any tax-exempt obligation (as defined in section 1275(a)(3)) from which 1 or more coupons have been stripped— “(1) the amount of original issue discount determined under subsection (a) with respect to any stripped bond or stripped coupon from such obligation shall be the amount which produces a yield to maturity (as of the purchase date) equal to the lower of— “(A) the coupon rate of interest on such obligation before the separation of coupons, or “(B) the yield to maturity (on the basis of purchase price) of the stripped obligation or coupon, “(2) the amount of original issue discount determined under paragraph (1) shall be taken into account in determining the adjusted basis of the holder under section 1288, “(3) subsection (b)(1) shall not apply, and “(4) subsection (b)(2) shall be applied by increasing the basis of the bond or coupon by the interest accrued but not paid before the time such bond or coupon was disposed of (and not previously reflected in basis).” 1986—Subsec. (b)(1). Pub. L. 99–514, § 1803(a)(13)(B)(i), amended par. (1) generally, designating existing provisions as subpar. (A) and adding subpar. (B). Subsec. (b)(2). Pub. L. 99–514, § 1803(a)(13)(B)(ii), substituted “the amount included in gross income under paragraph (1)” for “the amount of the accrued interest described in paragraph (1)”. Subsec. (d). Pub. L. 99–514, § 1879(s)(1), amended subsec. (d) generally. Prior to amendment, subsec. (d) read as follows: “In the case of any tax-exempt obligation (as defined in section 1275(a)(3))— “(1) subsections (a) and (b)(1) shall not apply, “(2) the rules of subsection (b)(4) shall apply for purposes of subsection (c), and “(3) subsection (c) shall be applied without regard to the requirement that the bond be purchased before
July 2, 1982.”
Statutory Notes and Related Subsidiaries
Effective Date
of 2018 AmendmentAmendment by section 401(c)(2)(A)–(C) of Pub. L. 115–141 applicable to bonds purchased on or after July 2, 1982, see section 401(c)(2)(E) of Pub. L. 115–141, set out as a note under section 305 of this title.
Effective Date
of 2004 AmendmentAmendment by Pub. L. 108–357 applicable to purchases and dispositions after Oct. 22, 2004, see section 831(c) of Pub. L. 108–357, set out as a note under section 305 of this title.
Effective Date
of 1988 Amendment Pub. L. 100–647, title I, § 1018(q)(4)(B), Nov. 10, 1988, 102 Stat. 3586, provided that: “(i) Except as provided in clause (ii), the amendment made by subparagraph (A) [amending this section] shall apply to any purchase or sale after
June 10, 1987, of any stripped tax-exempt obligation or stripped coupon from such an obligation. “(ii) If—“(I) any person held any obligation or coupon in stripped form on
June 10, 1987, and “(II) such obligation or coupon was held by such person on such date for sale in the ordinary course of such person’s trade or business, the amendment made by subparagraph (A) shall not apply to any sale of such obligation or coupon by such person and shall not apply to any such obligation or coupon while held by another person who purchased such obligation or coupon from the person referred to in subclause (I).”
Effective Date
of 1986 AmendmentAmendment by section 1803(a)(13)(B) of Pub. L. 99–514 applicable to obligations acquired after Oct. 22, 1986, see section 1803(a)(13)(C) of Pub. L. 99–514, set out as a note under section 1276 of this title. Pub. L. 99–514, title XVIII, § 1879(s)(2), Oct. 22, 1986, 100 Stat. 2913, provided that: “The amendment made by paragraph (1) [amending this section] shall apply to any purchase or sale of any stripped tax-exempt obligation or stripped coupon from such an obligation after the date of the enactment of this Act [Oct. 22, 1986].”
Effective Date
Section applicable to taxable years ending after July 18, 1984, except as otherwise provided, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title. Plan
Amendments
Not Required Until January 1, 1989For 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 Pub. L. 99–514 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 Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1286
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73