Bond Premium Amortization

If you pay a premium to buy a bond, the premium is part of your basis in the bond. If the bond yields taxable interest, you can choose to amortize the premium. This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. If you make this choice, you must reduce your basis in the bond by the amortization for the year.

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If the bond yields tax-exempt interest, you must amortize the premium. This amortized amount is not deductible in determining taxable income. However, each year, you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on your tax return) by the amortization for the year.

If you acquire a security, such as a bond, at a premium, you may receive a Form 1099-INT or Form 1099-OID. See the instructions on those forms to determine if the amounts of interest reported to you have been reduced by amortizable bond premium for the period.

Bond premium. Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050.

Special rules to determine amounts payable on a bond. For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1.171-3.

Basis. In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. However, you may need to use a different basis for:

• Convertible bonds,

• Bonds you got in a trade, and

• Bonds whose basis has to be determined using the basis of the person who transferred the bond to you.

See Regulations section 1.171-1(e).

Dealers. A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business, or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium.

See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds.

How To Figure Amortization

For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond’s yield to maturity, determined by using the bond’s basis and compounding at the close of each accrual period.

Constant yield method. Figure the bond premium amortization for each accrual period as follows.

Step 1: Determine your yield. Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including

payments of qualified stated interest), produces an amount equal to your basis in the bond. Figure the yield as of the date you got the bond. It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage.

If you do not know the yield, consult your broker or tax advisor. Databases available to them are likely to show the yield at the date of purchase.

Step 2: Determine the accrual periods. You can choose the accrual periods to use. They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year, and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. The computation is simplest if accrual periods are the same as the intervals between interest payment dates.

Step 3: Determine the bond premium for the ac- crual period. To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Then, subtract the result from the qualified stated interest for the period.

Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. After that, it is your basis decreased by the amount of bond premium amortized for earlier periods, and the amount of any payment previously made on the bond other than a payment of qualified stated interest.

Example. On February 1, 2024, you bought a taxable bond for $110,000. The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2031, making your premium $10,000 ($110,000 − $100,000). The bond pays qualified stated interest of $10,000 on February 1 of each year. Your yield is 8.07439% compounded annually. You choose to use annual accrual periods ending on February 1 of each year. To find your bond premium amortization for the accrual period ending on February 1, 2025, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. When you subtract the result ($8,881.83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118.17.

Special rules to figure amortization. For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1.171-3.

Choosing To Amortize

You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. You should attach a statement to your return that you are making this choice under section 171. See How To Report Amortization next.

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This choice is binding for the year you make it and for later tax years. It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years.

You can change your decision to amortize bond premium only with the written approval of the IRS. To request approval, use Form 3115. For more information on requesting approval, see section 5 of Revenue Procedure 2025-23 in Internal Revenue Bulletin 2025-24. You can find Revenue Procedure 2025-23 at IRS.gov/irb/ 2025-24_IRB#REVPROC-2025-23 .

How To Report Amortization (Taxable Bonds)

Subtract the bond premium amortization from your interest income from these bonds.

Report the bond’s interest on Schedule B (Form 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter the amortizable bond premium allocable to the interest payments for the year and label this amount “ABP Adjustment.” Subtract this amount from the subtotal, and enter the result on line 2.

Bond premium amortization more than interest. If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can include the difference in Other Itemized Deductions on Schedule A (Form 1040), line 16.

But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Any amount you cannot deduct because of this limit can be carried forward to the next accrual period.

Pre-1998 election to amortize bond premium. Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988.

Bonds acquired before October 23, 1986. The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit.

Bonds acquired after October 22, 1986, but before 1988. The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond.