What is the 'De Minimis Tax Rule'
The De Minimis tax rule is a rule that states that capital gains tax must be paid on a bond if the bond was purchased at a discount to the face value in excess of a quarter point per year between the time of acquisition and maturity. The reason for the capital gains tax is that the bondholder gains on the difference between the price paid and the price received at maturity, which is considered a capital gain.
BREAKING DOWN 'De Minimis Tax Rule'
To determine whether a bond is subject to this tax, calculate the amount of full years between the discounted bond's purchase date and the maturity date and multiply this by 0.25. Subtract the calculated amount from the bond's par value. If this amount is above the purchase price of the discount bond, the purchased bond is subject to capital gains tax.
For example, if you are looking at a 10-year bond with a par value of 100 and five years left until maturity, simply multiply five years by 0.25 to get 1.25. You then subtract the 1.25 from the par value to get the de minis cut off amount, which in this example is 98.75 (100-1.25). If the price of the discount bond you purchased is below 98.78 per 100 of par value you will be subject to capital gains tax under the de minimis tax rule.