De Minimis Tax Rule

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.

RELATED TERMS
  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Market Discount

    The difference between a bond's stated redemption price and its ...
  3. Pull To Par

    The movement of a bond's price toward its face value as it approaches ...
  4. Accrued Market Discount

    The gain in the value of a discount bond expected from holding ...
  5. Bond Discount

    The amount by which the market price of a bond is lower than ...
  6. Discount

    The condition of the price of a bond that is lower than par, ...
Related Articles
  1. Professionals

    Yield To Maturity

    A bond’s yield to maturity is the investor’s total annualized return for investing in the bond. A bond’s yield to maturity takes into consideration the annual income received ...
  2. Professionals

    Price Terms

    FINRA Series 6 Exam Study Guide - Price Terms. Discusses the important terms that apply to securities markets and bond pricing.
  3. Bonds & Fixed Income

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  4. Professionals

    Bond Pricing

    Once issued, corporate bonds trade in the secondary market between investors similar to the way equity securities do. The price of bonds in the secondary market depends on all of the following: ...
  5. Professionals

    Bond Pricing

    Once issued, corporate bonds trade in the secondary market between investors similar to the way equity securities do. The price of bonds in the secondary market depends on all of the following: ...
  6. Professionals

    Bond Features

    CFA Level 1 - Bond Features. Discuss the basics of bonds, including the purpose of an indenture. Covers types of covenants and the features of basic bonds.
  7. Professionals

    Calculating Yields

    When an investor purchases a bond in the secondary market at a discount, the discount must be accreted over the remaining life of the bond. The accretion of the discount will result in a higher ...
  8. Professionals

    Reporting The Retirement Or Conversion of Bonds

    CFA Level 1 - Reporting The Retirement Or Conversion of Bonds. Looks at the accounting impact of retiring bonds or converting them to stock. Includes calculations and examples for each case.
  9. Home & Auto

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  10. Bonds & Fixed Income

    Explaining Original Issue Discount

    An original issue discount is the amount below par at which a bond or other debt instrument is issued.
RELATED FAQS
  1. How is a corporate bond taxed?

    Understand the three components of a corporate bond that are subject to taxes. Learn about the ways the federal and state ... Read Answer >>
  2. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  3. Can the marginal propensity to consume ever be negative?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the basic components of bonds and how ... Read Answer >>
  4. What types of fees apply to checking accounts?

    Learn about the difference between a bond's coupon rate and its yield to maturity, and how the par value, coupon rate and ... Read Answer >>
  5. Will the price of a premium bond be higher or lower than its par value?

    Find out why the selling price of a premium bond is always higher than its par value, including how changing interest rates ... Read Answer >>
  6. How does face value differ from the price of a bond?

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center