Form 1099-OID: Original Issue Discount (2013) – A Complete Guide

Understanding Form 1099-OID might seem complicated at first, but this guide breaks it down into simple terms. Whether you're an investor who received this form or someone trying to understand what Original Issue Discount means, this comprehensive overview will help you navigate the 2013 tax year requirements.

What the Form Is For

Form 1099-OID reports a special type of interest income called Original Issue Discount (OID). Think of OID as invisible interest that builds up on certain bonds and debt instruments over time, even though you don't receive cash payments.

Here's how OID works in plain English: Imagine you buy a bond for $800 that will pay you $1,000 when it matures in 10 years. That $200 difference is the Original Issue Discount—it's essentially interest you're earning, but spread out over the life of the bond. The IRS considers this taxable income each year, even though you won't actually receive the money until the bond matures.

Common investments that generate OID include zero-coupon bonds, certain CDs with terms longer than one year, Treasury STRIPS, and corporate bonds issued at a discount.

Financial institutions, brokers, or bond issuers send you Form 1099-OID if your OID income totals $10 or more during the tax year. They also send this form if they withheld any foreign tax on your OID or applied backup withholding. The form helps you—and the IRS—track this "phantom income" you must report even though you haven't received actual cash.

When You’d Use It (Late or Amended Filing)

Filing Deadlines for 2013

• Copy B (Recipient Copy): Due to recipients by January 31, 2014
• Copy A (IRS Copy): Due by February 28, 2014 (paper) or March 31, 2014 (electronic)

Corrected or Late Filings

If you received a corrected Form 1099-OID after filing your 2013 tax return, you must file Form 1040X (Amended Return). Common reasons include:

• Calculation errors
• Incorrect taxpayer identification numbers
• Wrong OID amounts

If you failed to report OID income originally, you must amend your return to avoid underreporting penalties.

For Payers

Payers who discovered errors had to check the "CORRECTED" box on a new Form 1099-OID and submit it with Form 1096 to the IRS.

Key Rules for 2013

Minimum Reporting Threshold

Payers only needed to file Form 1099-OID if the includible OID was $10 or more for the year. However, the form was still required if any foreign or backup withholding occurred.

Who Must File

• Financial institutions
• Brokers acting as nominees
• Issuers of OID-bearing CDs (over one year)
• Trustees of WHFITs
• Issuers of REMICs and CDOs

Exempt Recipients

Entities exempt from receiving Form 1099-OID included corporations, tax-exempt organizations, IRAs, government agencies, and registered securities dealers.

The De Minimis Rule

OID can be treated as zero if it’s less than 0.25% of the bond’s redemption price × years to maturity.
Example: $1,000 bond × 10 years × 0.0025 = $25 threshold.

Backup Withholding

• 28% rate in 2013
• Applies if no correct TIN is provided
• Only on cash payments

Treasury Obligations

OID on Treasury securities was reported in Box 8, as it’s exempt from state/local tax but still federally taxable.

Step-by-Step Guide (High Level)

Step 1: Receive and Review Your Form

Ensure your name, address, and Social Security number are correct. Review all boxes carefully.

Step 2: Understand the Key Boxes

• Box 1: OID on corporate/non-Treasury obligations
• Box 2: Other periodic interest
• Box 4: Federal income tax withheld
• Box 8: OID on U.S. Treasury obligations

Step 3: Determine If Adjustments Are Needed

• Purchased at a premium → No OID
• Acquisition premium → Reduce OID
• Partial-year ownership → Prorate OID

Step 4: Report on Your Tax Return

• ≤ $1,500 total interest → Report on Form 1040EZ, 1040A, or 1040

$1,500 or with adjustments → Use Schedule B

Step 5: Calculate Basis Adjustments

Each year you include OID in income, increase your bond basis by that amount.

Step 6: Report Sales or Redemptions

Report on Form 8949 and Schedule D.
Gain/loss = Proceeds − Adjusted Basis.

Common Mistakes and How to Avoid Them

Mistake 1: Not Reporting OID Because No Cash Was Received

Avoid it: Remember, OID is taxable each year—even without payment.

Mistake 2: Double-Counting When Selling Bonds

Avoid it: Track cumulative OID reported to avoid duplicate income.

Mistake 3: Reporting OID on Bonds Bought at a Premium

Avoid it: If you paid more than redemption value, report zero OID.

Mistake 4: Mixing Treasury and Corporate OID

Avoid it: Report Treasury OID separately—it’s exempt from state tax.

Mistake 5: Nominee Reporting Errors

Avoid it: If holding for another person, issue your own 1099-OID and 1096.

Mistake 6: Using the Wrong Tax Form

Avoid it: Use Form 1040 if total interest > $1,500 or adjustments apply.

Mistake 7: Ignoring Mid-Year Purchases or Sales

Avoid it: Prorate OID for your actual holding period and attach a statement.

What Happens After You File

IRS Matching Process

The IRS compares payer-filed 1099-OID data to your tax return.

If Everything Matches

You’ll receive your refund or confirmation without issue.

If There’s a Discrepancy

You’ll get a CP2000 Notice for underreported income.
Respond to agree or dispute with documentation.

Penalties and Interest

• Accuracy-related penalty: 20% of underreported tax
• Interest: Accrues from April 15, 2014 until paid

Amended Return Processing

• Processing time: 8–12 weeks or more
• Refunds include interest; balances accrue interest until paid

Future Implications

OID increases your bond basis each year—important for future sales/redemptions.

State Tax Considerations

Report OID income on state returns (except Treasury OID, which is state-tax-exempt).

FAQs

Q1: What exactly is Original Issue Discount?

OID is the difference between what you paid for a bond and what you’ll receive at maturity. It’s treated as annual taxable interest.

Q2: Why do I have to pay tax on OID before I receive the money?

The IRS treats OID as annual interest accrual under accrual accounting rules.

Q3: I bought my bond midyear. Do I report the full year’s OID?

No. Report OID only for your holding period and attach an explanatory statement.

Q4: Can I avoid Form 1099-OID by keeping investments small?

You may not receive a form if OID < $10, but you must still report the income.

Q5: What if I disagree with the OID amount shown?

Contact the issuer to correct it or report the correct amount with an attached explanation.

Q6: I sold my OID bond at a loss. Do I still report OID?

Yes. Report accrued OID for your holding period, then claim the sale on Schedule D.

Q7: Do I need Schedule B if I only have $350 of OID?

Not if your total interest + OID ≤ $1,500 and no adjustments are needed.
Otherwise, Schedule B is required.

Sources

• IRS 2013 Instructions for Forms 1099-INT and 1099-OID
• Form 1099-OID (2013)
• IRS Publication 1212 (Dec 2013) – Guide to Original Issue Discount Instruments
• 2013 General Instructions for Certain Information Returns

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