A municipal bond bought at a small enough discount still gets capital-gain treatment on that discount — but a steeper discount is taxed as ordinary income instead, a trap many investors don’t expect from a “tax-free” bond.
How it works
Multiplying face value by 0.25% and by the full years to maturity, then subtracting from face value, gives the de minimis threshold. A purchase price at or above that threshold keeps capital-gain treatment; below it, the discount is ordinary income.
What this does not include
This does not include original issue discount (OID) bonds, which follow separate accretion rules, or the specific tax treatment differences between a bond bought at issuance versus on the secondary market.
How to use this calculator
- Enter face value, purchase price, and full years to maturity at purchase.
Frequently asked questions
Why does this matter for a “tax-free” municipal bond?
The bond’s interest payments stay tax-free, but a market-discount gain taxed as ordinary income under this rule is not — it can meaningfully cut into a muni bond’s after-tax return.
Does the de minimis rule apply to bonds bought at a premium?
No — it only applies to bonds purchased at a discount to face value; a premium purchase follows separate amortization rules.
Is the 0.25% rate the same for all bonds?
Yes, this is a fixed statutory rate applied per full year to maturity, regardless of the bond’s coupon or type.
