Two years ago, Mr. Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr. Young sold the bond for $47,100. Compute and characterize his gain or loss on sale.

Question

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Mr. Young purchased the bond for $40,000, and it redeemed for $45,000, resulting in a $5,000 ordinary income. When he sold the bond for $47,100, he made an additional $2,100 long-term capital gain. Therefore, his gain on sale is split between $5,000 ordinary income and $2,100 long-term capital gain, for a total gain of $7,100.

Two Years Ago, Mr