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I realized there was something missing on taxes on the difference between purchase price and face value for bonds purchased at a discount. As best I understand (Chris, Dan, correct me if I'm wrong), this is treated as income, taxed at your marginal rate, not as a capital gain, although how it gets reported is complicated.

Sounds right to me.

You'll want to be careful to distinguish the OID rules, which only refer to bonds where the initial offering price is at a discount, with the different rules that apply when you buy a bond on the secondary market at a discount or premium.

According to this:

http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=60

OID on a muni is tax-exempt, but if you buy a muni at a discount in the secondary market, some of the gain becomes ordinary income.

dan
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