Basis, Interest, and Taxable Interest

U.S. tax concepts for adjusted asset basis, Applicable Federal Rates, below-market loans, imputed interest, and taxable interest income.

Basis, Interest, and Taxable Interest covers two distinct measurement problems. Adjusted Tax Basis tracks unrecovered tax investment in an asset. The other three guides explain when a financing arrangement creates stated, accrued, or deemed interest income.

Use these pages to identify the record and rule that control the calculation. A purchase invoice does not capture every basis adjustment, an AFR is not a universal commercial lending rate, and a Form 1099 does not by itself determine whether interest is taxable.

Topic Map

QuestionGuide
What tax investment remains in an asset after improvements, depreciation, and other adjustments?Adjusted Tax Basis
Which monthly prescribed rate applies to a covered loan or deferred-payment transaction?Applicable Federal Rate (AFR)
Can tax rules recognize interest when the agreement states little or none?Imputed Interest
Which bank, bond, CD, Treasury, OID, or deemed interest enters taxable income?Taxable Interest

How the Concepts Connect

A related-party loan can illustrate the sequence:

  1. The agreement establishes principal, maturity or demand terms, stated interest, and payments.
  2. The relevant AFR helps test whether a covered arrangement is below market.
  3. Imputed-interest rules may create deemed interest and a separate gift, compensation, distribution, or capital transfer.
  4. The lender determines taxable interest from stated interest, OID, and any required imputation.
  5. If a debt instrument is later sold, its adjusted basis helps measure gain or loss separately from interest income.

Evidence to Preserve

  • Purchase and sale records for assets.
  • Improvement, depreciation, amortization, and distribution schedules.
  • Signed notes, payment histories, and loan modifications.
  • The official IRS revenue ruling containing the relevant AFR.
  • Forms 1099-INT and 1099-OID, brokerage statements, and issuer tax supplements.
  • Documents supporting the relationship and purpose of a related-party transfer.

Common Boundary Errors

  • Using fair market value as adjusted basis without a rule that requires it.
  • Treating an AFR as a borrower-specific market rate.
  • Applying demand-loan arithmetic to a fixed-term note.
  • Assuming the borrower always has income equal to the lender’s imputed interest.
  • Reporting only interest shown on an information form.
  • Treating tax-exempt interest as nonreportable or Treasury interest as federally exempt.

These guides provide general U.S. financial education, not individualized tax, legal, accounting, lending, estate-planning, or investment advice. Tax results depend on the governing provision, tax year, transaction documents, taxpayer, and jurisdiction.

In this section

Choose a subsection first. Deeper term pages live inside each subsection, which keeps large topic hubs readable.

Adjusted Tax Basis

Adjusted tax basis is an asset's starting tax basis after increases and decreases used to measure gain, loss, depreciation, and other tax items.

Applicable Federal Rate (AFR)

An Applicable Federal Rate is an IRS-published prescribed rate used in specified U.S. tax calculations for loans and deferred-payment transactions.

Imputed Interest

Imputed interest is interest that tax rules treat as paid or accrued when a covered loan states too little interest or no interest.

Taxable Interest

Taxable interest is interest included in income unless a specific exclusion applies, including many bank, CD, corporate-bond, and Treasury payments.

After-Tax Yields
Debt Discharge
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