Understanding Accrued Market Discount for Bond Redemptions at Maturity

The accrued market discount is indeed taxable as ordinary income. When you buy a bond at a discount and hold it to maturity, the IRS considers the difference between what you paid and the face value (redemption amount) as income. In your case, you purchased the bond for $12,000 and received $13,000 at maturity, creating a $1,000 difference. Your 1099-B is showing $675 of that as accrued market discount, which is treated as ordinary income (taxed at your regular income tax rate). The remaining difference likely represents the accrued interest and possibly other adjustments. When entering this in tax software, you'll need to report both the 1099-INT interest ($65) and the accrued market discount from your 1099-B ($675). The software should have a section specifically for reporting accrued market discount - it's usually found within the investment income section where you enter your 1099-B information. Many people miss reporting this properly because it's not intuitive that you'd owe taxes on something when the "Cost Basis = Proceeds" appears to show no capital gain.

After dealing with a similar bond situation last year, I found that taxr.ai (https://taxr.ai) was super helpful for sorting out these confusing tax documents. I was completely lost trying to figure out how to report accrued market discount correctly, especially since my tax software was asking questions I didn't understand. I uploaded my 1099-B and other tax forms to taxr.ai and it explained exactly what I needed to do. It showed me how to properly report the market discount as ordinary income and pointed out a couple of other bond-related deductions I would have missed. Saved me from potentially misreporting my investment income.

Just wanted to update that I tried taxr.ai after seeing the recommendation here, and it was actually super helpful! My situation was almost identical - bond purchased at discount, redeemed at maturity with accrued market discount reported on 1099-B. The platform explained that the accrued market discount is essentially the IRS's way of taxing the built-in gain on discounted bonds as ordinary income rather than capital gains. It walked me through exactly which boxes to check in TurboTax and explained that I should generally include the market discount in current income unless I've made a special election in the past. It even flagged that my broker had calculated the market discount using the straight-line method and explained what that meant. Honestly saved me hours of googling and potential errors.

If you're struggling to get answers about how to report your accrued market discount, you might want to try Claimyr (https://claimyr.com). I was in a similar situation with some bonds last year and couldn't get a straight answer from my tax software support or find reliable info online. After waiting on hold with the IRS for almost 2 hours and getting disconnected, I was ready to give up. Then I found Claimyr and they got me connected to an actual IRS agent in about 15 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through exactly how to report the accrued market discount and explained that it's treated as ordinary income. They also clarified how the election to amortize the discount works (which is what your tax software is probably asking about).

I was skeptical about Claimyr but I tried it after posting here, and I'm honestly shocked at how well it worked. After months of trying to get clear information about how to report my accrued market discount (which sounds very similar to your situation), I was connected to an IRS representative in about 20 minutes. The agent explained that for bonds acquired after April 30, 1993, the accrued market discount is always treated as ordinary income at disposition. He confirmed that even though my 1099-B showed equal proceeds and cost basis, I still needed to separately report the accrued market discount shown in Box 1f as ordinary income on Schedule B. He also explained that the question in tax software about "including market discount in income this year" refers to an election that most individual investors haven't made (and probably don't want to make) about amortizing the discount annually rather than at disposition. For most people, the answer should be "yes" to include it this year when the bond was redeemed. Definitely worth the time saved after my previous failed attempts to reach the IRS directly!

I think there's some confusion in this thread about market discount vs. original issue discount (OID). They're taxed differently: - Original Issue Discount (OID): Applies to bonds issued at a discount to face value. You're required to report the accretion of OID annually as interest income, even though you don't receive it until maturity. - Market Discount: Applies when you buy a bond in the secondary market at a discount. You can elect to report market discount annually as it accrues OR you can wait until disposition/maturity to report it all. Based on your description, you bought the bond at a market discount ($12,000 for a bond that matured at $13,000). Your broker is reporting $675 as accrued market discount which is taxable as ordinary income upon redemption, unless you previously made an election to report it annually.

This is why I hate bonds! Just stick with index funds and avoid all this complicated tax nonsense. Every time I've owned individual bonds I've regretted it come tax time.

I went through something very similar with Treasury bonds last year. One thing that helped me was understanding that the $675 accrued market discount on your 1099-B is essentially the taxable portion of your $1,000 total gain ($13,000 - $12,000). The difference between your total gain and the reported market discount likely accounts for the accrued interest and any other adjustments your broker made. When you enter this in your tax software, you'll report the $675 as ordinary income (not capital gains) and it gets added to your regular income. Combined with your $65 interest from the 1099-INT, you're looking at about $740 in additional taxable income from this bond. The key thing to remember is that even though your 1099-B shows no capital gain/loss, the IRS still wants their cut of the "built-in gain" you received by buying the bond at a discount. It's counterintuitive but that's how the tax code works for market discount bonds.

Just to add another perspective on this - I had a similar bond situation last year and made the mistake of trying to handle it myself initially. The tax software questions about market discount elections are confusing because they're asking about a choice most individual investors never make. Here's what I learned: When your 1099-B shows "Accrued Market Discount," that's money you need to report as ordinary income (taxed at your regular rates, not capital gains rates). The reason your Cost Basis equals Proceeds is because your broker already adjusted your basis to account for the market discount - but you still owe taxes on that discount amount. Think of it this way: You bought a $13,000 bond for $12,000. The IRS considers $675 of that $1,000 difference as taxable income that you earned by holding the bond. Even though you didn't receive a separate payment for it, it's built into the redemption value. So yes, you'll be taxed on $740 total ($675 market discount + $65 interest). Make sure when your tax software asks about including the market discount in current year income, you select "yes" - that's the normal treatment for most people who haven't made special elections about annual amortization.