PRIA, Government Policy, Made Personal

§454 Obligations Issued at Discount

Title 26 › 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 Sep 22, 2026|Official source

Summary

You can choose to treat the yearly increase in value of certain zero-interest bonds sold at a discount as taxable income for the year. If you pick this option on your tax return, it must apply to all similar bonds you owned at the start of the first year it covers and to any you buy later. That choice stays in effect for future years unless the Secretary of the Treasury lets you change under rules they set. For bonds you already owned when the choice starts, the increase in value from when you bought them up to the first day of that year must be included in that year’s income. For short-term U.S., state, local, or District of Columbia obligations sold at a discount and maturing within 1 year, you do not count the discount as income until the bond is paid at maturity, sold, or otherwise disposed of. For Series E U.S. savings bonds held to maturity and rolled into another qualifying U.S. obligation (or exchanged under rules like section 1037/related 1031 rules), the gain above what you paid is taxed in the year the new obligation is finally redeemed or reaches final maturity, whichever comes first. That rule does not apply to corporations, to taxpayers using accrual accounting, or in years when the election described above is in effect.

Title 26, §454

Internal Revenue Code, Source: USLM XML via OLRC

(a)Non-interest-bearing obligations issued at a discount

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)Short-term obligations issued on discount basis

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,

which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of.

(c)Matured United States savings bonds

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),

the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or in the taxable year of final maturity, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer’s taxable income is computed under an accrual method of accounting or for which an election made by the taxpayer under subsection (a) applies.

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).