Form 1099-OID: Original Issue Discount – 2024 Summary Guide
What Form 1099-OID Is For
Form 1099-OID is an IRS information return used to report original issue discount (OID), a special type of interest income. OID occurs when bonds or other debt instruments are issued at a price less than their redemption value at maturity. The classic example is a zero-coupon bond: you might buy a bond for $900 that will be worth $1,000 when it matures. That $100 difference is the OID, and it's treated as taxable interest that accrues over the life of the bond—even though you don't receive cash payments along the way.
Financial institutions, brokers, and issuers of debt instruments send you Form 1099-OID if you earned at least $10 in OID during the tax year, or if any foreign or federal income tax was withheld from your OID. The form reports the amount of OID that accrued while you held the security, so you know how much interest income to include on your federal tax return. Common debt instruments that generate OID include zero-coupon bonds, certain corporate bonds issued at a discount, stripped U.S. Treasury securities (STRIPS), certificates of deposit with terms over one year purchased at a discount, and REMIC (Real Estate Mortgage Investment Conduit) regular interests.
Understanding Form 1099-OID is important because you owe tax on OID each year as it accrues, not just when the bond matures or you sell it. This "phantom income" feature catches many taxpayers off guard, so the form helps you comply with tax law even when you haven't received cash yet. IRS.gov - About Form 1099-OID
When You’d Use Form 1099-OID
Who Issues Form 1099-OID
You typically receive Form 1099-OID rather than file it yourself. Issuers of debt instruments (banks, brokerage firms, bond issuers, trustees of certain trusts) are required to prepare and send you a 1099-OID by January 31 of the year following the tax year, or by February 15 if it's part of a consolidated statement. The issuer then files Copy A with the IRS by February 28 (or March 31 if filing electronically). Instructions for Forms 1099-INT and 1099-OID
Late or Corrected Forms
If you didn't receive your Form 1099-OID by early February, contact your broker or financial institution. Sometimes institutions discover errors after the original mailing and will issue a corrected Form 1099-OID marked "CORRECTED" in the top margin. If you already filed your tax return using the wrong information, you'll need to file an amended return (Form 1040-X) to report the correct OID amount.
Nominee Situations
If you receive a 1099-OID for an account where you're not the actual owner—perhaps you held the bond as a custodian or on behalf of someone else—you must issue a new Form 1099-OID to the true owner and file Form 1096 with the IRS. This "nominee reporting" ensures the correct person is taxed on the income.
Key Rules or Details for 2024
Minimum Reporting Threshold
Financial institutions must file Form 1099-OID if the total OID for the year is $10 or more, or if any foreign tax was withheld, or if federal income tax was withheld under backup withholding rules—regardless of the amount.
OID Accrual Method
OID is calculated using the constant yield method (also called "economic accrual"). For bonds issued after 1984, this means OID accrues daily over the life of the bond in a way that reflects the bond's yield to maturity. Each accrual period (typically six months or one year), you add a portion of OID to your taxable income. The daily OID amount increases slightly each period because it compounds—you're earning "interest on interest."
Acquisition Premium and Market Discount
- Acquisition premium: If you bought an OID bond after original issuance but paid less than its full maturity value (yet more than its adjusted issue price), you have acquisition premium. This reduces the OID you report each year, and your broker should account for this on your Form 1099-OID (Box 6).
- Market discount: If you bought the bond in the secondary market for less than its adjusted issue price plus accrued OID, you have market discount. Generally, this is taxed as ordinary income when you sell or redeem the bond—unless you elected to include it in income annually (in which case it appears in Box 5). Publication 1212
Covered vs. Non-Covered Securities
For bonds purchased after certain dates, brokers must track and report basis adjustments due to OID, acquisition premium, and bond premium. These "covered securities" get more detailed reporting. For older bonds or those not covered, you may need to calculate adjustments yourself.
Backup Withholding
If you didn't provide your correct Social Security Number or Tax ID to your broker, or if the IRS notified the payer that you underreported interest income, the institution may withhold 24% backup withholding from your OID payments. This withholding appears in Box 4 of Form 1099-OID and can be credited against your total tax when you file.
Step-by-Step (High Level)
Step 1: Receive and Review Your Form
By late January or mid-February, check your mail or online account for Form 1099-OID from each institution that holds OID debt instruments for you. Review the boxes:
- Box 1: OID on taxable corporate bonds or other private debt
- Box 2: Other periodic interest (qualified stated interest paid separately)
- Box 8: OID on U.S. Treasury obligations (like STRIPS)
- Box 11: Tax-exempt OID (from municipal bonds issued at a discount)
- Boxes 5 and 6: Market discount and acquisition premium adjustments
Step 2: Verify the Amounts
Compare Box 1 or Box 8 against your own records or Publication 1212 (the IRS's annual OID tables, available at IRS.gov/Pub1212). If you held the bond only part of the year or bought it mid-year at a different price, you may need to recalculate. Most brokers handle this for you, but double-check if something seems off.
Step 3: Report on Your Tax Return
- Taxable OID (Boxes 1 and 8): Report the total on Schedule B (Form 1040), line 1 if your total interest income exceeds $1,500. If your interest is less than $1,500, you can report it directly on Form 1040, line 2b. Be sure to label it as "OID" and include any adjustments for acquisition premium or market discount if they weren't already reflected on your 1099-OID.
- Tax-exempt OID (Box 11): Report on Schedule B, line 8 (tax-exempt interest) and also on Form 1040, line 2a. While it's not taxable for federal purposes, you must still report it, and it may affect other tax calculations (like the taxability of Social Security benefits or eligibility for certain credits).
Step 4: Increase Your Basis
Each year, the OID you report as income increases your adjusted tax basis in the bond. When you eventually sell or redeem the bond, your basis will be higher, which reduces your capital gain (or increases your capital loss). Keep good records of annual OID so you can accurately compute your gain or loss on Form 8949 and Schedule D when you dispose of the bond. Instructions for Forms 1099-INT and 1099-OID
Step 5: File and Keep Documentation
Attach Schedule B to your Form 1040 if required, and keep copies of all Forms 1099-OID with your tax records for at least three years (longer if you have complex basis adjustments). This documentation is essential if the IRS ever questions your interest income or capital gains calculations.
Common Mistakes and How to Avoid Them
Mistake 1: Ignoring "Phantom Income"
Many taxpayers forget that OID is taxable each year even though they receive no cash. Missing this can trigger IRS notices for underreported income. Solution: Always report the OID shown on your 1099-OID, and set aside cash from other sources to pay the tax if needed.
Mistake 2: Forgetting to Adjust Basis
If you don't add each year's OID to your bond's basis, you'll overstate your gain (or understate your loss) when you sell. Solution: Keep a running tally of OID reported each year and add it to your purchase price to determine adjusted basis at sale.
Mistake 3: Double-Reporting Interest
Some bonds pay periodic interest (Box 2, "Other Periodic Interest") in addition to OID. Make sure you're not also receiving a separate Form 1099-INT for the same interest payments. Solution: Review all your 1099 forms together. If both a 1099-OID and a 1099-INT arrive for the same bond, the instructions usually clarify how to avoid double-counting. Box 2 amounts on the 1099-OID should not also appear on a 1099-INT.
Mistake 4: Mishandling Acquisition Premium
If you bought a bond at a premium or with acquisition premium, the net OID you owe tax on is reduced. Some taxpayers report the full Box 1 amount without accounting for Box 6 adjustments. Solution: If Box 6 shows an acquisition premium amount, you may need to subtract it from Box 1 (unless your broker already netted it out). Read the instructions on the back of your 1099-OID copy or consult Publication 1212.
Mistake 5: Not Reporting Tax-Exempt OID
Tax-exempt OID (Box 11) must still be reported on your return, even though it's not taxable. Failing to report it can delay processing or trigger IRS questions. Solution: Always include Box 11 amounts on Schedule B, line 8, and Form 1040, line 2a.
Mistake 6: Losing Track After a Sale
When you sell a bond mid-year, you'll receive a 1099-OID for the portion of the year you held it, and a 1099-B for the sale proceeds. Taxpayers sometimes forget to reconcile these. Solution: Use the OID from your 1099-OID to adjust your basis on Form 8949 when you report the sale, ensuring you don't pay tax twice on the same accrued interest.
What Happens After You File
IRS Matching Process
The IRS receives Copy A of your Form 1099-OID from your broker and matches it to the amounts you reported on your tax return. If the numbers don't match—or if you forgot to report OID—the IRS's automated system will flag your return and you may receive a CP2000 notice (a "proposed change" notice) asking you to pay additional tax, interest, and possibly penalties.
Responding to an IRS Notice
If you get a CP2000 about unreported OID, review it carefully. If the IRS is correct, you can agree and pay the amount due. If you believe there's an error (for example, you did report the OID but on a different line, or there was a broker error), respond in writing with documentation (copies of your 1099-OID, Schedule B, and any worksheets). The IRS will review your response and adjust or withdraw the notice if you're correct.
Refunds and Amended Returns
If you discover after filing that your 1099-OID was incorrect and you overpaid taxes, file Form 1040-X to claim a refund. You generally have three years from the original filing deadline to amend and get your money back. Include the corrected 1099-OID and a clear explanation of the change.
Interest and Penalties
- Interest: If you underpaid because of missing OID, the IRS will charge interest from the original due date of your return.
- Penalties: Typically, the IRS won't assess a penalty for underreporting if you had "reasonable cause" (like a broker error), but repeated failures to report OID can lead to accuracy-related penalties of 20% of the underpayment.
State Tax Considerations
Most states follow federal rules for OID, so you'll need to report it on your state return as well. However, some states have different rules for tax-exempt bonds or municipal OID. Check your state's instructions (Boxes 12–14 on Form 1099-OID may show state-specific information). IRS.gov - About Form 1099-OID
FAQs
1. Do I owe tax on OID even if I never received any cash?
Yes. OID is treated as interest that accrues over time. You must include it in your income each year, even though you won't receive the actual cash until the bond matures or you sell it. This is often called "phantom income."
2. What if I bought the bond partway through the year—do I still report the full OID?
No. You only report OID for the days you actually owned the bond. Your broker should calculate this and report the correct prorated amount on your Form 1099-OID. If you're calculating it yourself (for a non-covered security), use the daily OID amounts in Publication 1212 and multiply by the number of days you held the bond in each accrual period.
3. How do I know if my bond has OID?
Check your purchase confirmation or account statements. Zero-coupon bonds and bonds issued at a significant discount will have OID. If your broker sends you a Form 1099-OID, that's definitive proof. You can also look up publicly offered bonds in IRS Publication 1212.
4. What's the difference between OID on Form 1099-OID and interest on Form 1099-INT?
Form 1099-INT reports regular interest payments (like the semiannual coupon payments on a traditional bond). Form 1099-OID reports the accrued discount on bonds issued below face value. Some bonds can generate both forms: you might receive periodic interest (1099-INT) plus have OID accruing (1099-OID). Just be careful not to double-report the same income—Box 2 on Form 1099-OID (qualified stated interest) should not also appear on a 1099-INT for the same bond.
5. Can I avoid reporting OID by holding the bond in a tax-deferred account?
Yes! If you hold OID bonds in an IRA, 401(k), or other tax-deferred retirement account, the OID accrues tax-free until you take distributions in retirement. You won't receive a Form 1099-OID for bonds held in these accounts, because the income isn't currently taxable. This is a common strategy to avoid the "phantom income" problem.
6. What should I do if my Form 1099-OID looks wrong?
First, contact your broker or the issuer to ask for clarification or a corrected form. Brokers occasionally make mistakes, especially with acquisition premium or market discount calculations. If you believe the form is incorrect, you can report the correct amount on your tax return with an explanation, but keep thorough documentation. If the IRS questions it later, you'll need to prove your calculation was correct (often with reference to Publication 1212 or IRS regulations).
7. Does OID affect state taxes?
Generally, yes—most states tax OID the same way the federal government does. However, if you have OID from a municipal bond issued by your state, it may be exempt from both federal and state tax (Box 11). Check your state's rules and look at Boxes 12–14 on Form 1099-OID for any state-specific withholding or reporting.
Additional Resources
- IRS Publication 550 (Investment Income and Expenses): Detailed guidance on OID, bond premium, and market discount
IRS.gov/Pub550 - IRS Publication 1212 (Guide to Original Issue Discount Instruments): Annual OID tables and calculation instructions
IRS.gov/Pub1212 - Instructions for Forms 1099-INT and 1099-OID: Official line-by-line instructions for payers and recipients
IRS.gov/instructions/i1099int - Form 1099-OID (current year): Download blank forms and instructions
IRS.gov - About Form 1099-OID
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