§454 — Title 26 Internal Revenue Code | U.S. Code

§454 Obligations Issued at Discount

Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter E— Accounting Periods and Methods of Accounting › Part II— METHODS OF ACCOUNTING › Subpart B— Taxable Year for Which Items of Gross Income Included › § 454

Last updated Apr 5, 2026|Official source

Summary

A taxpayer may choose on his tax return to count the increase in the redemption price of certain non‑interest‑bearing discount obligations (those paid in fixed amounts that rise at set times, including some series E bonds) as income in the taxable year, even if his normal accounting does not count it that year. That choice must apply to all such obligations he owned at the start of the first year it applies and to any he buys later. The choice is binding for later years unless the Secretary allows a change with conditions. For obligations owned at the start of that first year, any increase that happened from the date bought to the first day of the year is also treated as income in that year. The rule covers obligations of the United States, and obligations of a State, a U.S. possession, a political subdivision of those, or the District of Columbia. It also covers a taxpayer who holds a series E United States savings bond at maturity and, under regulations made under chapter 31 of title 31, either keeps it invested in a United States obligation that is not a current‑income obligation or exchanges it for another nontransferable United States obligation in an exchange where gain or loss is not recognized under section 1037 (or the part of section 1031 that relates to section 1037).

Title 26, §454

Internal Revenue Code — Source: USLM XML via OLRC

(a)If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation described in paragraph (2) of subsection (c), the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation described in paragraph (2) of subsection (c), the date of acquisition of the series E bond involved) and the first day of such taxable year shall also be treated as income received in such taxable year.

(b)In the case of any obligation—

(1)of the United States; or

(2)of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia,

(c)In the case of a taxpayer who—

(1)holds a series E United States savings bond at the date of maturity, and

(2)pursuant to regulations prescribed under chapter 31 of title 31 (A) retains his investment in such series E bond in an obligation of the United States, other than a current income obligation, or (B) exchanges such series E bond for another nontransferable obligation of the United States in an exchange upon which gain or loss is not recognized because of section 1037 (or so much of section 1031 as relates to section 1037),

Notes & Related Subsidiaries

Editorial Notes

Amendments

1983—Subsec. (c)(2). Pub. L. 97–452 substituted “chapter 31 of title 31” for “the Second Liberty Bond Act”. 1976—Subsec. (a). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary” in two places. Subsec. (b)(2). Pub. L. 94–455, § 1901(c)(2), struck out “, a Territory,” after “a State”. 1959—Subsec. (c)(2). Pub. L. 86–346 designated existing provisions as cl. (A), inserted “of the United States” after “an obligation” and struck out “the maturity value of” before “such series E bond” and “which matures not more than 10 years from the date of maturity of such series E bond” after “income obligation” in such cl. (A), and added cl. (B).