Contingent Payment Debt Instruments

Any gain recognized on the sale, exchange, or retirement of a taxable contingent payment debt instrument subject to the noncontingent bond method is treated as interest income rather than as capital gain, even if you hold the debt instrument as a capital asset. If you sell a taxable contingent payment debt instrument subject to the noncontingent bond method at a loss, your loss is an ordinary loss to the extent of your prior original issue discount (OID) inclusions on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID inclusions as a capital loss. See Regulations section 1.1275-4(b) for exceptions to these rules.

If you received a Form 1099-B or Form 1099-DA (or substitute statement) reporting the sale of a taxable contingent payment debt instrument subject to the noncontingent bond method and the Ordinary box in box 2 on Form 1099-B is checked or the Ordinary box in box 6 on Form 1099-DA is checked, an adjustment may be required. Report the transaction on Form 8949 and complete the form’s Worksheet for Contingent Payment Debt Instrument Adjustment in Column (g) to figure the adjustment to enter in column (g) of Form 8949.

See Pub. 550 or Pub. 1212 for more details on any special rules or adjustments that might apply.