What tax implication arises when a municipal bond purchased at par is sold at par or above after being bought at a discount?

When a municipal bond purchased at a discount is sold at par or above, the tax implication involves the recognition of a taxable gain. This stems from the fact that the gain realized when the bond is sold is attributable to the difference between the sale price and the original discounted purchase price. Although municipal bonds are typically exempt from federal income tax, the gain that results from the sale of a bond purchased at a discount and sold at par or above is treated as a capital gain, which may be subject to taxation if it exceeds the original discount amount.

The key aspect here is that when a bond is bought at a discount, the portion of the gain that makes up the accrued discount is considered taxable, unlike the interest on municipal bond income, which is usually exempt. Thus, when the bond is sold at par or higher, this gain realization triggers a tax liability, reinforcing the correct choice regarding the taxable nature of this transaction.