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De Minimus Tax Rule – Definition

De Minimis Tax Rule Definition

De Minimis tax rule, when translated means ‘about minimal things’, the concept was coined from a latin expression “de minimis non curat lex.” In taxation, the De Minimis tax rule is one that determines if discount on municipal bonds should be subject to capital gains tax or income tax. This concept is crucial to how employee benefits are taxed. According to this tax rule,  discount on a municipal bond between the period of acquisition and maturity that is lower than a quarter point in a pear is too little to be tagged as a discount. A discount help for over a year is a capital gain.

A Little More on What is the De Minimis Tax Rule

In the United States, the Internal Revenue Service states certain rules that are permissible in the de minimis tax rule. For instance, there is a rule that guides how a minimal discount will be estimated. In accordance to the minimis tax rule, a bond can be regarded as a capital gain for taxation purpose if it is bought at a minimal discount. Below is how a municipal bond can be determined as capital gain tax or ordinary income tax under de minimis tax rule;

  • The face value of the municipal bond would be multiplied by 0.25%.
  • Afterwards that result will be multiplied by the number of full years between the bond’s purchase date and the maturity date. (this is the de minimis amount)
  • Deduct the de minimis amount for the face value of the bond.

If the amount is more than the purchase price, the bond will be taxed as but if the amount is more than the de minimis threshold, it will be subject to capital gains tax.

Here is an example of how a discount bond can be determined as capital gain tax or ordinary income tax;

Dave purchases a municipal bond that has a 15-year maturity date. The face value of the bond at the period of purchase is 200 and the bond has 5 years left before maturity. The de minimis discount will be calculated as

Par value (200) x 0.0025 x 5 years = 2.25. This is the de minimis discount.

The amount is then deducted from the face value of the bond (200). The result will determine whether the bond is subject to capital gains tax or ordinary income tax.  If the amount is higher than the de minimis amount of 2.25, ordinary income taxation is applicable.

Reference for “De Minimis Tax Rule”

 

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