If you buy a bond at a premium, the following rules apply:

Tax Exempt Bonds - The premium must be amortized over the term of the bond (Code Sec. 171(a)(2)). While no deduction is permitted for the amount of premium amortized in each year, the effect is to reduce basis in the bond by a corresponding amount. Thus, if the taxpayer holds it to maturity, no loss is recognized when the bond is paid off.

Taxable Bonds - The premium may be amortized at the holder's election.

Normally, the sale, call before maturity or redemption of a municipal bond is treated the same as a taxable bond. If the bond was held long enough, any gain is taxed at long-term capital gain rates.