26 U.S.C. § 1272: Current inclusion in income of original issue discount

For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument. Any tax-exempt obligation. Any United States savings bond. Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue. such loan is not made in the course of a trade or business of the lender, and the amount of such loan (when increased by the outstanding amount of prior loans by such natural person to such other natural person) does not exceed $10,000. Clause (i) shall not apply if the loan has as 1 of its principal purposes the avoidance of any Federal tax. For purposes of this subparagraph, a husband and wife shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all times during the taxable year in which the loan is made. the adjusted issue price of the debt instrument at the beginning of such accrual period, and the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), over the sum of the amounts payable as interest on such debt instrument during such accrual period. the issue price of such debt instrument, plus the adjustments under this subsection to such issue price for all periods before the first day of such accrual period. Except as otherwise provided in regulations prescribed by the Secretary, the term “accrual period” means a 6-month period (or shorter period from the date of original issue of the debt instrument) which ends on a day in the calendar year corresponding to the maturity date of the debt instrument or the date 6 months before such maturity date. the sum of (I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and (II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over the adjusted issue price of such debt instrument at the beginning of such period. the original yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), events which have occurred before the close of the accrual period, and a prepayment assumption determined in the manner prescribed by regulations. any regular interest in a REMIC or qualified mortgage held by a REMIC, any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events), or any pool of debt instruments the yield on which may be affected by reason of prepayments (or to the extent provided in regulations, by reason of other events). For purposes of this subsection, in the case of any purchase after its original issue of a debt instrument to which this subsection applies, the daily portion for any day shall be reduced by an amount equal to the amount which would be the daily portion for such day (without regard to this paragraph) multiplied by the fraction determined under subparagraph (B). the cost of such debt instrument incurred by the purchaser, over the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this paragraph), and the denominator of which is the sum of the daily portions for such debt instrument for all days after the date of such purchase and ending on the stated maturity date (computed without regard to this paragraph). who has purchased the debt instrument at a premium, or which is a life insurance company to which section 811(b) applies. any acquisition of a debt instrument, where the basis of the debt instrument is not determined in whole or in part by reference to the adjusted basis of such debt instrument in the hands of the person from whom acquired. The basis of any debt instrument in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to this section. such change shall be treated as initiated by the taxpayer, such change shall be treated as made with the consent of the Secretary of the Treasury, and the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year.”