Zebra in finance refers to a specific taxation method applied to zero-coupon bonds, where the accrued interest, known as imputed or phantom income, is taxed annually even though the bondholder does not receive actual interest payments until maturity.
In the case of zero-coupon bonds, investors purchase these bonds at a discount to their face value. The difference between the purchase price and the face value represents the imputed interest income. Even though the investor doesn’t receive cash interest payments until the bond matures, some tax authorities consider the imputed interest as taxable income.
This approach ensures that investors are taxed annually on the increase in the bond’s value due to accrued interest, even if they haven’t received any money yet. It’s a way for tax authorities to collect taxes on the income that investors effectively earn as the bond appreciates over time.
It’s essential to note that the specific taxation rules regarding zero-coupon bonds, including when and how accrued income is taxed, can vary between countries and jurisdictions. Tax laws and regulations are complex and subject to change, so it’s crucial for investors to consult with tax professionals or local tax authorities to understand the taxation implications of zero-coupon bonds in their specific region.