How is OID Reported on a Tax Return?

Most interest income is straightforward: You receive a Form 1099-INT and enter the number on your tax return. But Original Issue Discount (OID) works differently, as it's a type of "phantom" interest you must report as income before you receive the cash. We will walk you through what OID is, where to find the numbers you need, and exactly how to report it—including common adjustments—on a tax return.

What is Original Issue Discount (OID)?

Original Issue Discount (OID) is a form of interest that usually occurs when a bond or other debt instrument is issued for a price less than its stated redemption price at maturity (par value). The difference between these two values is the OID. Essentially, this discount serves as a form of non-cash interest, making up for the bond not paying a high-enough coupon rate of periodic interest.

Here’s a simple example: A corporation issues a 10-year bond with a stated redemption price of $1,000. However, investors can purchase it at issuance for just $900. That $100 difference is the OID.

The IRS considers this discount to be taxable interest that accrues over the life of the bond. Even though you don’t receive this $100 until the bond matures in 10 years, you can’t wait until year 10 to report it. Instead, you must recognize a portion of the OID as income each year you hold the bond, even if you are a cash-basis taxpayer. This concept prevents taxpayers from deferring interest income for years on end.

Fortunately, you don't typically have to calculate the annual OID inclusion amount yourself. The issuer or your brokerage firm does the complex calculations and reports the correct amount for the tax year on Form 1099-OID.

Locating OID: Decoding Form 1099-OID

The primary source document for reporting OID is Form 1099-OID, Original Issue Discount. You'll receive this form from your broker or the debt issuer if you have more than $10 of OID income for the year. This form provides all the numbers you need, but understanding the individual boxes is important for accurate reporting.

Here’s a breakdown of the most common boxes:

• Box 1: Original Issue Discount. This is the headline number. It shows the amount of OID income accrued during the year that you must report on your tax return. For most federal government and corporate bonds, this income is taxable.
• Box 2: Other periodic interest. If the debt instrument also pays regular cash interest (coupons), that amount will be here. This is handled exactly like the interest you see on a standard Form 1099-INT.
• Box 6: Acquisition Premium. This is a key adjustment. If you purchased the bond in a secondary market for more than its adjusted issue price but less than its maturity value, you have paid an acquisition premium. This premium allows you to reduce the amount of OID you report. For example, if Box 1 is $80 and Box 6 is $10, you only need to report $70 of OID income.
• Box 8: Original issue discount on U.S. Treasury obligations. This amount is still federally taxable OID, but it holds a special status: it is exempt from state and local income taxes. Like Box 1, this figure gets reported on your federal return but can be subtracted on your state tax return.
• Box 11: Bond Premium. You pay a bond premium when you purchase a bond for a price greater than its stated redemption price at maturity. If this box is populated, it means you've bought a bond at a premium. Unlike an acquisition premium, you can't just subtract this from your OID. Instead, you may be able to elect to amortize this premium over the remaining life of the bond to reduce your taxable interest income.

Many brokerages now issue a single consolidated Form 1099 that combines information from 1099-OID, 1099-INT, 1099-DIV, and 1099-B filings. The reporting process remains the same regardless of the format.

How to Report OID on Your Tax Return: A Step-by-Step Guide

Once you have your Form(s) 1099-OID, the actual reporting takes place primarily on Form 1040, Schedule B. Taxpayers must file a Schedule B if their total interest and ordinary dividend income exceeds $1,500.

Let's walk through an example. Suppose you received a Form 1099-OID with the following:

• Box 1 (OID): $200
• Box 2 (Other periodic interest): $50
• Box 6 (Acquisition Premium): $30
• Box 8 (Treasury OID): $100

Step 1: Report Interest and OID Income on Schedule B

You begin by listing all taxable interest and OID in Part I of Schedule B. Modern tax software products like Drake Tax or Intuit ProConnect will handle the flow of information from data entry to the forms.

1. List the payer's name and the total reported interest in the corresponding columns on Line 1.
2. You would first list the full, unadjusted amount from Box 1 and Box 8, plus the interest from Box 2. In our example that's $200 + $100 + $50 = $350. By reporting the gross amount directly from the amount reported to the IRS, you avoid automated underreporter notices.

Step 2: Make Necessary Adjustments on Schedule B

Accurately reporting adjustments is how financial professionals add value and ensure you don't overpay taxes. This is where you account for amounts like the acquisition premium.

1. Adjust for Acquisition Premium: Our 1099-OID listed $30 in Box 6 for acquisition premium. You need to subtract this amount from the total OID you reported.
2. Just below your list of payers on Line 1, write a description like "Acquisition Premium Adjustment" or "OID Adjustment."
3. In the amount column, enter the amount from Box 6 ($30) as a negative number, i.e., ($30).

So, the total taxable OID income would be calculated as: ($200 Corporate OID + $100 Treasury OID) - $30 Acquisition Premium = $270. Your total interest income from this form is $270 plus the $50 of 'other interest.'

Step 3: Account for Other Adjustments

There are other situations where an adjustment is needed:

• Amortized Bond Premium: If you elect to amortize a bond premium (as reported in Box 11 of Form 1099-OID or a different box, likely a Box 13 in the brokerage summary), this amount would also be a negative adjustment on Line 1 of Schedule B. Write a description such as "ABP Adjustment" and enter the negative amount.
• Accrued Interest on Purchases: If you purchased the bond between interest due dates, your broker will indicate the amount of accrued interest. This should also be entered as a negative adjustment just like the acquisition premium.

Step 4: Carry Totals from Schedule B to Form 1040

After all income and adjustments are listed on Schedule B, sum Lines 1. The total in our example ($350 - $30 = $320) goes on Schedule B, Line 2. Then you would transfer this total to Form 1040, Lines 2b.

Step 5: Adjust State Income for U.S. Government Bond Interest

The $100 Treasury OID in Box 8 from this example, included as federal income, is exempt from state and local tax. Your state income tax return will have a specific form or line allowing you to subtract interest earned from U.S. government obligations from your state-level adjusted gross income. Don't forget this important subtraction when working in multiple states, as laws can vary substantially.

Special Scenarios to Consider

OID taxation has subtleties that often cause confusion.

Market Discount vs. Original Issue Discount

It is a common mistake to confuse Market Discount with Original Issue Discount. Market Discount arises when you buy a bond on the secondary market for a price lower than its adjusted issue price. OID is created on issuance, while Market Discount is created by changes in interest rates after issuance.

Unlike OID, which must be accrued annually, Market Discount is treated as ordinary income at the time of a sale or redemption unless you make the election to include it in income annually. Taxpayers who receive a Form 1099-OID may also have market discount not shown on the form.

The De Minimis Rule

The IRS provides a "de minimis rule," which considers OID to be de minimis if it is less than one quarter of 1% (.0025) of the stated redemption price multiplied by the number of complete years to maturity. If the OID is de minimis, you don't report it as income annually. Instead, the whole amount is typically treated as a capital gain when the bond is sold or redeemed, which is often more favorably taxed.

What If You Didn't Get a Form 1099-OID?

If you didn't receive a Form 1099-OID but believe you have OID income (e.g., from certain certificates of deposit or other debt instruments), you are still responsible for calculating and reporting it. The process involves using information in IRS Publication 1212 to determine accruals. This is a much more complicated scenario where tax software and professional guidance can become significant.

Final Thoughts

Reporting OID is manageable once you understand the workflow: Start with Form 1099-OID, transfer the total amount of income on Schedule B, and then account for adjustments like acquisition premium subtraction to ensure that taxable income is in order.

For tax accounting professionals delivering complex guidance on issues like OID, bond premium amortization, and market discount, a significant part of the work involves understanding these complexities. Instead of spending hours thumbing through dense IRS publications, Feather can give you citation-backed answers and insights, helping you free up time to focus on high-end strategic advice for your clients.