Tax treatment for a discounted bond?

We bought a 6% APR bond from a well known brokerage at a deep discount .... about 85 cents on the dollar. It's still investment grade, but we understand that it could go either way.
Assume all goes well.
Assume the bond matures in 10 years and pays the semi-annual dividend on time.
When do we declare the discount interest on our taxes? I was thinking we would do so when the bond cashes out in ten years. Will that extra money be interest or capital gain?
IF I sell the bond at a profit in the future before it matures ... say 90 cents on the dollar, would that change the discount received from interest to capital gains?
Please cite your basis for your answer.
Thank you in advance.

We live and are taxed in the USA mainland.

You will get a 1099 form from your brokerage, or whoever issues the Interest payments to you (if you bought it directly from the Issuer). Since you bought this at discount, the discount is going to be refigured into your interest payments and will be reflected on your 1099.
Its pretty easy really.

see instructions to Schedule B, form 1040

you amortize the discount over the remaining life of the bond and report the amortization amount as income each year until you sell it or it matures or it goes in default and bankruptcy.

the amortization adds to your basis in the bond for capital gains tax purposes -- for the year in which you sell it -- or capital loss if default. See instructions to Schedule D [cap gains and losses] for apportionment of the net gain between long term and short term when the time comes [I do not trust that Congress won't change the holding period or treatment of the amortization] and/or deduction of losses.


does this help?

As an individual taxpayer you are on a cash basis. You do not have to amortize the bond discount. If the bond was originally issued at a discount, you have to amortize the original issue discount (OID), and this will be reported to you on your 1099 forms. but your discount occurred in the market, not at original issue. You can record the bonds at their cost, and when they mature or you sell them for more than cost, you recognize capital gains. This is favorable because the capital gains tax rate is lower than the rate on interest income.

Taxpayers who buy bonds at a premium may elect to amortize the premium because that reduces their interest income, but there is no point in amortizing the discount. Only certain nominee taxpayers are required to amortize bond discount.