When zero coupons bonds mature do you have to pay taxes on the entire gain?

I purchased governement zero coupon type bonds 20 years ago under a custodial account for my daughter. The purchase price was $1000 and in 20 years they matured at around $8000. Does my daughter have to pay taxes on the interest earned over this 20 year period at this time?When zero coupons bonds mature do you have to pay taxes on the entire gain?
Most likeley yes, it is earned income unless the bond states it is Tax Exempt,but even then it is considered Earned income under the 2002 Tax Law.When zero coupons bonds mature do you have to pay taxes on the entire gain?
Woah! Don't pay mind to the first answer!





Zero coupon bonds get taxed in a special way. Through a calculation known as ';accretion';, the bond accrues interest EACH YEAR. You should have paid income tax on a portion of the gain each year you held the bond.





Essentially, a zero coupon works this way: You buy the bond at a deep discount. When it matures, you redeem the bond for face value.





There IS NO CAPITAL GAIN if you redeem the bond at maturity! The gain is always ZERO.





Example: A $10,000 face value bond matures in 10 years. You buy it today for $5,000. Using accretion method, the ';imputed'; interest is $500 each year for ten years. You are supposed to pay income tax on that $500 each year. When the bond matures, you collect $10,000 tax free (other than the last year's $500 interest).





The WealthBuilder


Enrolled Agent / Tax Specialist