Bond Premium on Treasury Obligations: Electing, Reporting, Basis

If you paid more than face value for a Treasury note or bond, that extra amount is a bond premium on Treasury obligations, and you have a choice at tax time: elect to amortize the premium each year, which reduces the federally taxable interest you report, or leave it alone and recover the premium as a capital loss or reduced gain when you sell or the bond matures. The annual election uses the constant yield method, gets reported on Schedule B with the label “ABP Adjustment,” and, once made, applies to every taxable bond you own.

What a Premium Is and Why It Matters

You pay a premium whenever a bond’s price exceeds its face value. Treasuries with coupon rates above current market yields routinely trade at a premium on the secondary market, because a higher coupon is worth paying extra for.

Treasury interest sits in an unusual spot in the tax code. It is fully subject to federal income tax and entirely exempt from state and local income taxes.¹ Any premium amortization you claim reduces only the federal portion. Your state exemption is unaffected because there was no state tax on that interest to begin with.

Should You Elect to Amortize?

For taxable bonds, including Treasuries, amortization is elective. Nothing requires you to take the annual deduction.² The tradeoff is direct. Elect, and each year you reduce ordinary interest income taxed at your marginal rate. Skip it, and you report the full coupon every year, then recover the premium at disposition — as a smaller gain if you sell above your basis, or as a capital loss if the bond redeems at par.

The election usually comes out ahead for investors in higher brackets. A dollar-for-dollar reduction against ordinary income each year is generally more valuable than a capital loss at the end, and capital losses face an annual cap: they offset capital gains in full, but losses in excess of gains can offset only $3,000 of ordinary income per year, or $1,500 if married filing separately, with the remainder carrying forward.³

Skipping the election can make sense if you expect to be in a materially lower bracket in the year of sale, or if you plan to use the eventual capital loss against large gains that year.

Making the Election

You make the election by claiming the amortization offset on your federal return for the first year you want it to apply, and by attaching a statement to that return indicating you are electing under Section 171.⁴ There is no separate IRS form. Reporting the amortization and attaching the statement is the election.

The choice is broad and binding. Once made, it covers every taxable bond you held at the start of that tax year and every taxable bond you acquire afterward.⁵ You cannot apply it to some bonds and not others.

Revoking It Later

Reversing course requires IRS approval. Revocation is treated as a change in accounting method, so you file Form 3115 under the applicable revenue procedure.⁴ If the IRS approves, the revocation applies to all taxable bonds you hold in or after the effective year, and any remaining unamortized premium on those bonds is forfeited. There is no catch-up adjustment.

Calculating the Annual Amount

For bonds issued after September 27, 1985, the IRS requires the constant yield method.⁴ Straight-line amortization, spreading the premium evenly across the remaining years, is not permitted.

The calculation runs in three steps.⁶

Find the yield. This is the discount rate, calculated to at least two decimal places, that sets the present value of all remaining coupon and principal payments equal to what you paid. The yield is fixed for the life of the bond.
Set your accrual periods. You choose the length, but no period can exceed a year, and every scheduled payment must fall on the first or last day of a period. Most investors follow the bond’s semiannual coupon schedule.
Compute the period’s amortization. Multiply the adjusted acquisition price at the start of the period by the yield. The difference between the coupon paid and that yield-based amount is the premium amortized for the period.

Your adjusted acquisition price begins at cost and drops each period by the premium already amortized.⁶ Because the yield rate stays constant while the basis shrinks, the amortized amount grows slightly each period.

A quick illustration: on a $10,000 Treasury note bought for $10,500 with five years left and a 5% coupon, the constant yield works out to roughly 3.85%. Multiplying $10,500 by 3.85% gives about $404 of yield-based interest in year one. The premium amortized that year is $500 minus $404, or $96. The basis for the next period drops to $10,404.

In practice, your broker runs the schedule. Brokerages are required to track amortization on covered securities and report it on your year-end statements. Keep your purchase confirmation and the yield calculation anyway in case the numbers ever get questioned.

Reporting It on Your Return

Treasury interest appears on Form 1099-INT in Box 3, which is reserved for interest on U.S. Savings Bonds and Treasury obligations.⁷ Do not assume Box 11, labeled “Bond Premium,” relates to your Treasuries. It applies to other taxable bonds. Treasury bond premium is handled separately.

Read the 1099-INT closely before making any adjustment. If the broker has already netted the amortization against interest, the Box 3 figure is the reduced number and you report it as shown, with no further adjustment on Schedule B.⁸ Subtracting the premium a second time is a common error.

If the broker reported the gross interest without netting, you make the adjustment yourself on Schedule B:⁴

List the full interest amount on line 1.
Enter a subtotal of all line 1 interest below your last entry.
Below the subtotal, enter the amortization amount and label it “ABP Adjustment.”⁸
Subtract the ABP Adjustment from the subtotal and put the result on line 2.

Using the earlier numbers, you would list $500 on line 1, subtract $96 as the ABP Adjustment, and carry $404 to line 2. The $96 flows through to reduce your adjusted gross income.

One boundary case: if amortization for a period ever exceeds the interest on that bond, the excess can be claimed as an itemized deduction on Schedule A, but only up to the amount by which your total interest income across all bonds exceeds total amortization.⁴ This mostly comes up with bonds bought at steep premiums close to maturity.

What Happens to Basis at Sale or Maturity

Every dollar of premium you amortize reduces your basis in the bond. The statute requires this to prevent a double benefit, once through the annual interest offset and again through a higher basis at disposition.⁹

If you elected to amortize and hold to maturity, your basis reaches face value by the redemption date, and redeeming at par produces no capital gain or loss. Selling earlier means the gain or loss is measured against your adjusted basis, which is original cost minus cumulative amortization.

If you did not elect, your full original premium stays in the basis. Holding a premium bond to maturity and redeeming at par then produces a capital loss equal to the premium you paid above face. That loss offsets capital gains in full, but only $3,000 of ordinary income per year ($1,500 if married filing separately), with the rest carrying forward.³ The total tax benefit is similar either way. The timing and the character of the deduction are what differ.

Callable Treasuries

Some Treasury securities can be called before maturity, and the call date can change the calculation. If using the earlier call date produces a smaller amortizable premium for the period ending on that date, the statute requires you to use the call date rather than the maturity date.² If the bond is actually called, the amortization for the year of the call absorbs any remaining unamortized premium: the excess of adjusted basis over the call price is treated as premium allocable to that final period.

Callable Treasuries are uncommon among recent issues but still exist in the secondary market for older bonds. If you hold one, confirm that your broker’s amortization schedule reflects the call date.

1
Internal Revenue Service. Topic No. 403, Interest Received
2
GovInfo. 26 USC 171 – Amortizable Bond Premium
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
5
eCFR. 26 CFR 1.171-4 – Election to Amortize Bond Premium on Taxable Bonds
6
eCFR. 26 CFR 1.171-2 – Amortization of Bond Premium
7
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
8
Internal Revenue Service. Instructions for Schedule B (Form 1040) (2025)
9
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis