26 U.S.C. § 1276 — Disposition gain representing accrued market discount treated as ordinary income

(a)(1) Unless this section provides otherwise, gain from disposing of a market discount bond is ordinary income up to the bond's accrued market discount. The gain is recognized despite other subtitle rules. (2) For a disposition other than a sale, exchange, or involuntary conversion, the person is treated as realizing the bond's fair market value. (3)(A) A partial principal payment is ordinary income up to the accrued market discount. (B) That included amount reduces accrued market discount for later dispositions or partial payments. (4) Except for sections 103, 871(a), 881, 1441, 1442, and 6049, and other provisions specified by regulations, income treated as ordinary under (1) or (3) is treated as interest for this title. (b)(1) Unless this subsection or subsection (c) says otherwise, accrued market discount bears the same ratio to total market discount as the days the taxpayer held the bond bear to the days from acquisition through maturity. (2)(A) A taxpayer may elect for a bond to accrue discount using the aggregate amount that would have been included under section 1272(a), without paragraph (2), if the bond had been originally issued on the acquisition date at a price equal to the taxpayer's basis immediately after acquisition. (B) For a bond with original issue discount, its stated redemption price is treated as its revised issue price, and regulations determine the original issue discount portion. (C) The election cannot be revoked. (3) For a bond whose principal may be paid in two or more payments, regulations determine accrued market discount. (c) Regulations must provide rules for nonrecognition transactions. (1) If the bond is transferred as transferred-basis property, the transferee is treated as acquiring it when and for the amount the transferor acquired it, with proper adjustments for transferor gain and discount included by the transferor. (2) If paragraph (1) does not apply, accrued discount not previously treated as ordinary income becomes accrued discount on the exchanged-basis property if that property is a market discount bond, or becomes ordinary income when that property is disposed of if it is not. (3) A bond whose transferee basis is determined under section 732(a) or (b) is treated as transferred-basis property. (d) Regulations must apply rules similar to section 1245(b), except that its paragraph (1) does not apply; exchanges qualifying under sections 354(a), 355(a), or 356(a), without regard to subsection (a), are treated as exchanges under section 1245(b)(3); and section 1245(b)(3) is applied without its reference to section 351. Regulations must also make appropriate basis adjustments for gain recognized under subsection (a).