Taxes and Debt Retirement
If you buy a bond when it is first issued and hold it until it matures, the issuer pays you the par value to retire the debt. Since bonds are usually sold at par value, there are no tax consequences. You simply get your money back. When you buy a bond on the open market after it is issued, the price is typically different from the par value. If you bought the bond at a discount, you'll have a net gain when the debt is retired. For instance, when you buy a $1,000 face value bond for $975 and you are paid $1,000 when the debt is retired, you have a taxable capital gain of $25. If you buy the bond at a premium, you'll still be paid par value and thus have a capital loss.