Threshold = par × 0.0025 × complete years from settlement to maturity. Market discount = par − purchase price. If the market discount is less than the threshold it is treated as zero. Source: 26 U.S.C. § 1278(a)(2)(C); MSRB, "Tax and Liquidity Considerations for Buying Discount Bonds".
Federal tax only, held to maturity. State tax, net investment income tax and early sales are not included. Not tax advice.
If a bond's market discount is less than 0.25% of its redemption price multiplied by the number of complete years to maturity after you buy it, the discount is treated as zero. Your gain at maturity is then a capital gain instead of ordinary income (26 U.S.C. § 1278(a)(2)(C)).
Cutoff price = par − (par × 0.0025 × complete years to maturity). For a $100 bond with 10 full years left, the cutoff is $97.50.
The rule requires the discount to be less than the threshold, so a price exactly at the cutoff is not de minimis and the discount is taxed as ordinary income.
For a bond issued at a discount, market discount is measured from the revised issue price (issue price plus accreted OID), not par. Enter the revised issue price in the par field for those bonds.
No. It assumes you hold to maturity. A sale before maturity needs the accrued portion of market discount, which this page does not calculate.