4.19 Reporting Original Issue Discount on Your Return

The issuer of the bond (or your broker) will make the Original Issue Discount (OID) computation and report in Box 1 of Form 1099-OID the OID for the actual dates of your ownership during the calendar year. In most cases, the entire OID must be reported as interest income on your return. However, the amount shown in Box 1 of Form 1099-OID must be adjusted if you bought the bond at a premium or acquisition premium, the bond is indexed for inflation, the obligation is a stripped bond or stripped coupon (including zero coupon instruments backed by U.S. Treasury securities), or if you received Form 1099-OID as a nominee for someone else. Your basis in the bond is increased by the OID included in income.

If you did not receive a Form 1099-OID, contact the issuer or check IRS Publication 1212 for OID amounts.

Treasury inflation-indexed securities.

You must report as OID any increase in the inflation-adjusted principal amount of a Treasury inflation-indexed security that occurs while you held the bond during the tax year. This amount should be reported to you in Box 6 of Form 1099-OID, but this amount must be adjusted if during the year you bought the bond after original issue or sold it. The adjusted amount of OID must be computed using the coupon bond method discussed in IRS Publication 1212.

Periodic interest (non-OID) paid to you during the year on a Treasury inflation-indexed security may be reported to you either in Box 2 of Form 1099-OID or in Box 3 of Form 1099-INT.

Filing Tip

Reporting OID and Recomputed OID

If you are reporting the full amount of OID from Box 1 of Form 1099-OID, include the amount as interest on your Form 1040, 1040A, or 1040EZ. However, if you are reporting less OID than the amount shown in Box 1 of Form 1099-OID, you must adjust the reportable amount on Schedule B (Form 1040 or 1040A). Include the full amount shown in Box 1 of Form 1099-OID on Line 1 of Schedule B, along with other interest income. Make a subtotal of the Line 1 amounts and subtract from it the OID you are not required to report. Write “OID Adjustment” on the line where you show the subtraction. Label the subtraction “Nominee Distribution” if that is the reason for the reduction.

Your basis for the obligation is increased by the taxable OID for purposes of figuring gain on a sale or redemption (4.23).

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Premium.

If you paid a premium (4.18) for a bond originally issued at discount, you do not have to report any OID as income. Report the amount shown on Form 1099-OID and then subtract it as discussed in the Filing Tip in this section.

Acquisition premium.

The amount that is shown in Box 1 of Form 1099-OID is not correct if you pay an acquisition premium (4.18) because such premium reduces the amount of OID you must report as income. See IRS Publication 1212 to recompute OID. On your return, report the amount shown on Form 1099-OID and then reduce it, as discussed in the Filing Tip in this section.

Stripped bonds or coupons.

The amount that is shown in Box 1 of Form 1099-OID may not be correct for a stripped bond or coupon (4.22). If it is incorrect, adjust it following the rules in Publication 1212.

Nominee.

If you receive a Form 1099-OID for an obligation owned by someone else, other than your spouse, you must file another Form 1099-OID for that owner. The OID computation rules shown in IRS Publication 1212 should be used to compute the other owner’s share of OID. You file the other owner’s Form 1099-OID and a transmittal Form 1096 with the IRS, and give the other owner a copy of the Form 1099-OID. On your own tax return, report the amount shown on the Form 1099-OID you received and then reduce it, as discussed in the Filing Tip in this section.

Periodic interest reported on Form 1099-OID.

If in addition to OID there is regular interest payable on the bond, such interest will be reported in Box 2 of Form 1099-OID. However, for a Treasury inflation-indexed security, the interest may be reported in Box 3 of Form 1099-INT. Report the full amount as interest income if you held the bond for the entire year. If you acquired the bond or disposed of it during the year, figure the interest allocable to your ownership period (4.15).

REMICS.

If you are a regular interest holder in a REMIC (real estate mortgage investment conduit), Box 1 of Form 1099-OID shows the amount of OID you must report on your return and Box 2 includes periodic interest other than OID. If you bought the regular interest at a premium or acquisition, the OID shown on Form 1099-OID must be adjusted as discussed above. If you are a regular interest holder in a single-class REMIC, Box 2 also includes your share of the REMIC’s investment expenses. These expenses should be listed in a separate statement and are deductible on Schedule A as a miscellaneous itemized deduction subject to the 2% adjusted gross income floor (19.1).