Bond Premium Bond premium is the amount by which your basis in a bond rightafter you get it is more than the total of all amounts payable on thebond after you get it (other than payments of qualified statedinterest). The term "bond," as used in this discussion, means anyinterest-bearing bond, debenture, note, or certificate or otherevidence of debt. The term does not include any obligationlisted below. Your stock in trade. accommodation in NoordwijkProperty that would properly be included in your inventoryif on hand at the close of the tax year. Property held by you primarily for sale to customers in theordinary course of your trade or business. Tax-exempt bonds.If the bond yields tax-exempt interest, you must amortize thepremium. You cannot deduct the amortizable premium in figuring yourtaxable income. However, each year you must reduce your basis in thebond by the amortization for the year. Taxable bonds.You can choose to amortize the premium on taxable bonds. Thisgenerally means that each year, over the life of the bond, you usepart of the premium to reduce the amount of interest includible inyour income. If you make this choice, you must reduce your basis inthe bond by the amortization for the year. The premium on the bond ispart of your basis in the bond. Inflation-indexed instruments.An inflation-indexed debt instrument is generally a debt instrumenton which the payments are adjusted for inflation and deflation (suchas Treasury inflation-indexed securities). Determine the premium on aninflation-indexed debt instrument as of the date you acquire theinstrument by assuming that there will be no inflation or deflationover the remaining term of the instrument. Allocate the premium overthe remaining term of the instrument by making the same assumption.Reduce the instrument's interest income for the tax year by thepremium allocable to the tax year. Use any excess premium allocable tothe tax year to offset the original issue discount on the instrumentfor the year. Basis adjustment.If you are required to amortize bond premium, or choose to do so,you must decrease the basis of the bond by the amortizable bondpremium. The result is the adjusted basis you use to figure gain orloss on the sale or redemption of the bond. More information.For more information on how to figure and report bond premium, seePublication 550.