Tax Treatment of Taxable Debt Securities

What this video covers

• Why coupon interest on corporate bonds is taxed as ordinary income at the federal, state, and local level
• How original issue discount (OID) creates phantom income, why it is accreted annually, and why it is taxed as ordinary income (never capital gain)
• Why zero-coupon bonds belong in tax-deferred accounts like Individual Retirement Accounts (IRAs) and 401(k)s
• How premium amortization on a corporate bond is optional (unlike municipal bonds where it is required) and how it reduces both taxable interest and cost basis
• Why a market discount captured at maturity is recharacterized as ordinary income, not capital gain
• How OID accretion adjusts basis upward while premium amortization adjusts basis downward, with par as the gravitational pull
• How to compute capital gain or loss on an early sale using adjusted basis instead of the original purchase price