Final answer:
The annual tax implication of a zero coupon bond depends on the investor's tax bracket and the specific tax laws. The imputed interest, calculated as the difference between the bond's face value and purchase price, is taxable as ordinary income at the investor's marginal tax rate.
Step-by-step explanation:
The annual tax implication of a zero coupon bond depends on the investor's tax bracket and the specific tax laws of the country where the bond is issued. In general, an investor who holds a zero coupon bond until maturity will be subject to tax on the imputed interest, which is calculated as the difference between the bond's face value and the price paid for the bond. This imputed interest is treated as ordinary income and is taxable at the investor's marginal tax rate.
For example, if an investor purchases a zero coupon bond with a face value of $1,000 for $800 and holds it until maturity, they will be subject to tax on the $200 in imputed interest. The tax rate applied to this imputed interest will depend on the investor's tax bracket.
It is important to note that tax laws can change, so it is always advisable to consult with a tax professional or the relevant tax authority in your jurisdiction for accurate and up-to-date information on the tax implications of zero coupon bonds.