Which bonds are exceptions when classifying market discount bonds?

Tax-exempt obligations bought before May 1, 1993, are indeed exceptions when classifying market discount bonds because of specific tax laws governing their treatment. Under the Internal Revenue Code, market discount bonds are typically subject to tax rules that treat the discount as ordinary income when the bond is sold or matures. However, tax-exempt obligations have different considerations, particularly when they were issued before a certain cutoff date.

The reason for this exception is partly historical, as tax laws have evolved to provide favorable treatment to certain types of municipal bonds and other tax-exempt instruments. Specifically, obligations issued before the date mentioned are often subject to distinct accounting rules, which determine how discount is handled and reported. Therefore, these exceptions are in place to prevent unintended tax consequences for investors and maintain consistency in tax reporting and compliance.

The other types of bonds mentioned, such as corporate bonds issued after 1993, municipal bonds, and government bonds, follow standard market discount treatment without any specific exceptions, making them fully subject to the typical rules applied to market discount in taxation.