Bond premium taxation
- If you pay more than face value to buy tax-exempt bonds, you must amortize the premium each year. The amount of the tax-exempt interest from the bonds that you report on your tax return is reduced by the amortized amount.
- Amortization of the premium reduces your basis in the bond by the amortized amount; the amortized amount is not deductible.
- If you pay more than face value to buy taxable bonds, you can choose to amortize the premium. If you choose to do so, the amortized amount is deductible, and your basis in the bonds is reduced by the amortized amount.
- If you choose not to amortize the premium on taxable bonds, the premium will create a tax loss when the bonds are redeemed at face value.