Bonds and T-Bills on Your 1099-B — Accrued Market Discount Explained

You built a Treasury ladder when yields got interesting. Bills, a few notes bought on the secondary market, maybe some corporate bonds. Now your 1099-B has a column you've never had to think about before — Box 1f, "Accrued market discount" — with numbers in it, and a checkbox in Box 2 marked "Ordinary" that seems to contradict everything else on the form.

Box 1f is the IRS's way of saying part of your bond profit isn't a capital gain at all. It's interest, taxed at ordinary rates, and it has to be moved off Schedule D and onto Schedule B. This guide covers what market discount is, why it's taxed the way it is, how T-bills differ from every other bond you own, and exactly how to report it.

What Market Discount Is

Market discount is the gap between what you paid for a bond on the secondary market and what it will pay at maturity.

You buy a corporate bond with $10,000 face value for $9,200 because rates rose after it was issued. That $800 gap is market discount. Hold to maturity and you collect $10,000 — an $800 profit that has nothing to do with the coupon.

The tax code's position is that this profit is economically interest, not appreciation. You didn't buy an asset that grew in value; you bought a fixed future payment at a discount because prevailing rates were higher. So Section 1276 treats accrued market discount as ordinary income, taxed at your marginal rate, not at preferential capital gains rates.

Market discount is not the same as original issue discount. OID arises when a bond is issued below face value — zero-coupon bonds, for instance — and it accrues into your income annually, reported on Form 1099-OID. Market discount arises later, in the secondary market, and it's generally recognized when you sell or the bond matures. Two different rules, two different forms.

The de minimis exception. If the discount is less than 0.25% of face value multiplied by the number of full years to maturity, it's treated as zero and the whole gain is capital. On a $10,000 bond with 5 years remaining, that threshold is $125 — a bond bought at $9,950 falls under it and you can ignore market discount entirely.

What Box 1f Is Telling You

Box 1f reports the accrued market discount — the portion of your market discount that accrued during your holding period and must be recognized as ordinary income on this disposition.

Your broker computes it, typically using the ratable (straight-line) method by default: total market discount divided by days to maturity, multiplied by days you held it.

Related boxes to check on the same row:

• Box 1d — proceeds
• Box 1e — cost basis, which does not include the accrued market discount
• Box 2 — an "Ordinary" checkbox that gets marked when a gain or loss is ordinary rather than capital
• Box 1g — wash sale loss disallowed, unrelated to market discount but sitting right next to it

You can elect under Section 1278(b) to include market discount in income annually as it accrues rather than waiting until disposition. Almost nobody does — it accelerates tax with no offsetting benefit — but if you made the election in a prior year, your Box 1f handling differs because you've already reported the income.

How to Report It on Form 8949

The mechanic is a two-sided move: the accrued market discount comes out of your capital gain and goes in to your interest income.

Step 1 — Report the accrued market discount as interest. The Box 1f amount goes on Schedule B as interest income, described as something like "Accrued market discount — [security name]." From there it flows to Form 1040 and is taxed at your ordinary rate. Our overview of Schedule D vs Schedule B covers the division between the two.

Step 2 — Report the sale on Form 8949 with the proceeds and basis exactly as the broker reported them.

Step 3 — Enter adjustment code D in column (f) and put the accrued market discount amount in column (g).

Step 4 — Check your work. The adjustment must reduce your capital gain in column (h) by exactly the Box 1f amount. If your column (h) figure went up instead, the sign is backwards. This is the check that matters more than memorizing the convention — the economic result is that the same dollars are never taxed twice, once as interest and again as capital gain.

Our complete Form 8949 adjustment codes reference covers code D alongside the rest.

A worked example. You buy a $10,000 face corporate bond for $9,200 with four years to maturity. Two years later you sell for $9,800.

• Total market discount at purchase: $800
• Accrued over two of four years, ratably: $400 — this is your Box 1f
• Proceeds: $9,800. Basis per Box 1e: $9,200. Raw gain: $600
• $400 is reported as interest income on Schedule B
• The code D adjustment reduces the capital gain to $200, which is your actual capital appreciation

Total profit is still $600. It's split into $400 ordinary and $200 capital.

T-Bills Work Differently

Treasury bills are the most common fixed income holding in retail accounts right now, and they follow a separate rule that catches people out.

T-bills have maturities of one year or less, which makes them short-term obligations. Their discount isn't market discount — it's acquisition discount, governed by a different code section. The practical differences:

Held to maturity. The discount is ordinary interest income in the year of maturity, and it typically shows up on your 1099-INT — often in the box for interest on US savings bonds and Treasury obligations — not on a 1099-B. Many T-bill investors never see a 1099-B for their bills at all, which is correct.

Sold before maturity. Now you get a 1099-B. The accrued portion of the discount is ordinary income and any remainder is short-term capital gain or loss. Because the holding period can't exceed one year, T-bill gains are never long-term.

State tax matters here. Treasury interest, including the discount, is exempt from state and local income tax. That exemption is a meaningful part of the after-tax return in a high-tax state, and it's easy to lose by categorizing the income wrong when you file. Make sure the amount is flagged as Treasury interest, not generic interest.

Treasury notes and bonds — maturities over a year — follow the regular market discount rules described above, so a note bought below par on the secondary market does generate Box 1f amounts.

Where This Goes Wrong

Ignoring Box 1f entirely. The most common error. You report a clean capital gain, the IRS matching system sees interest income it expected on Schedule B, and you get a notice. The dollar amounts are often small; the correspondence is not.

Double-counting. Reporting the Box 1f amount as interest and leaving the capital gain unadjusted taxes the same money twice. The code D adjustment is what prevents this.

Assuming the basis includes it. Box 1e reports what you paid. It does not include accrued market discount, which is precisely why the adjustment exists.

Treating a T-bill like a bond. Different rules, different form, and the state exemption is easy to forfeit.

Missing the noncovered case. Bonds acquired before broker basis reporting extended to debt instruments are noncovered — the broker reports proceeds but not basis, and possibly not Box 1f either. Then the entire computation is yours. See noncovered securities with missing cost basis.

Municipal bonds. Tax-exempt interest doesn't make market discount tax-exempt. Accrued market discount on a muni bought below par is taxable ordinary income even though the coupon isn't. This surprises nearly everyone holding munis.

FAQ

What is Box 1f on a 1099-B?

Accrued market discount — the portion of your below-par purchase discount that accrued while you held the bond. It's taxed as ordinary interest income, not capital gain.

Why is my bond gain taxed as ordinary income?

Because market discount is economically interest. Section 1276 recharacterizes the accrued portion as ordinary income when you dispose of the bond.

What is adjustment code D on Form 8949?

The code used when a 1099-B reports accrued market discount in Box 1f. It removes that amount from your capital gain, since you're reporting it as interest on Schedule B instead.

Do T-bills get a 1099-B?

Only if you sell before maturity. Held to maturity, the discount is interest income reported on a 1099-INT.

Is T-bill income state tax exempt?

Yes. Interest on Treasury obligations, including the discount, is exempt from state and local income tax. Make sure it's categorized correctly on your state return.

What is the de minimis rule for market discount?

If the discount is less than 0.25% of face value times the full years to maturity, it's treated as zero and the entire gain is capital.

Is market discount on a municipal bond taxable?

Yes. The coupon is tax-exempt but accrued market discount is taxable ordinary income.

What's the difference between market discount and OID?

OID exists at issuance and accrues into income annually on Form 1099-OID. Market discount arises from buying below par on the secondary market and is generally recognized at disposition.

Bottom Line

Box 1f is the 1099-B telling you that part of your bond profit is interest wearing a capital gain's clothing. Move that amount to Schedule B, adjust the Form 8949 row with code D so the capital gain drops by the same figure, and confirm the arithmetic nets to your actual total profit.

Two extras worth holding onto: T-bills follow their own short-term obligation rules and are state-tax-exempt, and market discount on a municipal bond is taxable no matter how tax-free the coupon is.

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