Bond Premium Amortization: Basic Rules
Published November 6, 2026
Some bonds cost more than the amount the issuer will pay back. The extra amount is called bond premium. Publication 550 (2025), Investment Income and Expenses, explains how to treat it. This guide is general information. It is not advice about your return.
What bond premium is
The publication says bond premium is the amount by which your basis in a bond, right after you get it, is more than the total of all amounts payable on the bond after that date. Payments of qualified stated interest are not counted in that total.
The publication gives an example. A bond with a maturity value of $1,000 generally has a $50 premium if you buy it for $1,050.
The premium is part of your basis
The publication says the premium is part of your basis in the bond. For figuring amortization, your basis is generally the same as your basis for figuring a loss when you sell the bond.
Taxable bonds: you may choose to amortize
If a bond pays taxable interest, you can choose to amortize the premium. Amortizing means that each year, over the life of the bond, you use part of the premium to reduce the interest you include in income.
If you make this choice, you must also reduce your basis in the bond by the amount amortized for the year.
Tax-exempt bonds: you must amortize
If a bond pays tax-exempt interest, the publication says you must amortize the premium. The amount amortized is not deductible. Each year, you must reduce your basis in the bond by the amount amortized. You must also reduce the tax-exempt interest you report by that amount.
Check your Form 1099-INT or 1099-OID
If you buy a security at a premium, you may get a Form 1099-INT or Form 1099-OID. The publication says to read the instructions on those forms. They show whether the interest reported to you was already reduced by amortizable bond premium.
How the amount is figured
For bonds issued after September 27, 1985, the publication says you must use the constant yield method. The method uses the bond's yield to maturity.
The first step is to find your yield. The yield is the discount rate that makes the present value of all remaining payments on the bond equal your basis in the bond, as of the date you got it. The publication says it must be constant over the term of the bond. It also says you can use your broker or tax advisor to find the yield if you do not know it.
Then you figure the premium for each accrual period. The publication says you can choose accrual periods of up to 1 year. Many people use the dates between interest payments.
Dealers
The publication says a dealer in taxable bonds cannot deduct amortizable bond premium. A dealer is someone who holds bonds mainly for sale to customers in the ordinary course of a business. For dealers in tax-exempt bonds, the publication points to section 75 of the Internal Revenue Code.
Simple steps
- Find the premium: the amount you paid, minus the amounts still payable on the bond.
- Check whether the bond pays taxable or tax-exempt interest.
- For tax-exempt bonds, amortize the premium every year.
- For taxable bonds, decide whether you will amortize. If you do, reduce your basis by the amount each year.
- Check your Form 1099-INT or 1099-OID to see whether the interest was already reduced.
Premium is different from original issue discount. For that rule, see our guide to Form 1099-OID and original issue discount. To see where interest goes on your return, read Schedule B, interest and ordinary dividends.
Upload your documents and answer a few simple questions to start your return.
Sources: Sources: IRS, Publication 550 (2025), Investment Income and Expenses (https://www.irs.gov/pub/irs-pdf/p550.pdf) This is general information, not advice about your specific return.
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