how does the irs tax zero coupon bonds 
imputed interest sometimes referred to as phantom interest is an estimated interest rate the imputed interest on the bond is subject to income tax the irs uses an accretive method when calculating the imputed interest on treasury bonds and sets a minimum interest rate relative to imputed interest and the original price discount 2the bottom linezero coupon bonds are an alternative to the better known coupon bonds that pay regular interest to their investors zero coupon bonds pay no interest but are purchased at a deep discount and repaid at full price most zero coupon bonds are long term issues 10 or more years is common they are often used to finance a long range goal such as paying for a child s college education one big thing to consider the owners of zero coupon bonds pay a phantom interest tax on the bonds earnings through the years they hold them 