Form 1099-OID: Original Issue Discount (2015 Tax Year) — A Complete Guide
When you invest in bonds, certificates of deposit, or similar debt instruments purchased at a discount, you need to understand Form 1099-OID. This form reports a special type of interest income that builds up over time—even if you haven't received actual cash payments yet. Here's everything you need to know about Form 1099-OID for the 2015 tax year, explained in plain English.
What Form 1099-OID Is For
Form 1099-OID (Original Issue Discount) is an IRS information return used to report a specific type of interest income from debt instruments that were issued at a discount from their face value. IRS.gov
Understanding Original Issue Discount
Imagine you buy a bond for $950 that will pay you $1,000 when it matures. That $50 difference isn't just a lucky deal—it's actually interest income that accumulates (or "accrues") over the life of the bond. This is called Original Issue Discount (OID). The IRS treats this discount as interest that you must report each year, even though you won't receive the money until the bond matures. IRS.gov
Common examples include:
- Zero coupon bonds (bonds that pay no interest until maturity)
- Certificates of deposit (CDs) issued at a discount with terms longer than one year
- Corporate bonds sold below face value
- Treasury bonds purchased at discount through the STRIPS program
- Certain Real Estate Mortgage Investment Conduit (REMIC) regular interests
Who files this form? Financial institutions, brokers, and other middlemen who hold OID obligations for investors must file Form 1099-OID if the OID includible in gross income is at least $10, or if any foreign tax was withheld, or if federal income tax was withheld under backup withholding rules. IRS.gov
Who receives this form? Individual investors who hold qualifying OID debt instruments receive Copy B of Form 1099-OID from their broker or financial institution by January 31 following the tax year (or February 15 if included in a consolidated reporting statement).
When You’d Use It (Late or Amended Filing)
Original filing deadlines for 2015:
- For payers (brokers/institutions): Copy B to recipients by January 31, 2016; filing with IRS by February 29, 2016 (paper) or March 31, 2016 (electronic)
- For taxpayers: Report OID income on your 2015 tax return filed by April 18, 2016
When to file corrected forms: If you discover errors in reporting OID income after filing your 2015 tax return, you may need to file an amended return using Form 1040X. The IRS generally prefers corrections within three years of the original filing date, as this aligns with the statute of limitations for claiming refunds. IRS.gov
Situations requiring corrected or amended returns:
- Your broker sent a corrected 1099-OID showing different OID amounts
- You failed to report OID income on your original return
- You discover calculation errors in acquisition premium or market discount adjustments
- Incorrect taxpayer identification numbers were reported
- You received a late-arriving 1099-OID after filing your return
Important note: For recipients, you typically have three years from the original return due date or two years from when you paid the tax (whichever is later) to file an amended return claiming a refund. For the 2015 tax year filed in 2016, this generally means until April 2019.
Key Rules or Details for 2015
- $10 Reporting Threshold: Payers must file Form 1099-OID if OID includible in gross income totals $10 or more for the calendar year. However, forms must also be filed for any amount if foreign tax was withheld or backup withholding applied. IRS.gov
- Backup Withholding Rate: In 2015, the backup withholding rate was 28% and applied when recipients failed to provide correct taxpayer identification numbers (TINs) or when the IRS notified payers of underreporting. This only applied to actual cash payments, not phantom OID income.
- Qualified Stated Interest: Interest payments made at fixed intervals (typically semi-annually) are called "qualified stated interest" and could be reported in Box 2 of Form 1099-OID or separately on Form 1099-INT. This provided flexibility for payers reporting both OID and regular interest on the same obligation.
- FATCA Reporting Requirements: For 2015, new checkboxes appeared on Form 1099-OID to identify foreign financial institutions (FFIs) filing to satisfy Chapter 4 reporting requirements under the Foreign Account Tax Compliance Act.
- Bond Premium Rules: For covered securities (generally, bonds acquired after 2013), brokers must report bond premium amortization in Box 10 if the bond was purchased at a premium, unless the holder notified them of an election not to amortize. Payers could report either net interest (reduced by premium amortization) or gross amounts in separate boxes. IRS.gov
- Market Discount Reporting: Box 5 was designated for reporting market discount on covered securities if the taxpayer made a section 1278(b) election to include market discount in income as it accrued.
- Exempt Recipients: Certain entities were exempt from receiving Form 1099-OID, including corporations, tax-exempt organizations, IRAs, governmental agencies, registered securities dealers, and brokers acting as nominees.
- Short-term vs. Long-term Obligations: OID on obligations with terms of one year or less is reported on Form 1099-INT (not Form 1099-OID). Only long-term debt instruments with maturities exceeding one year appear on Form 1099-OID.
Step-by-Step (High Level)
For Recipients (Individual Investors)
Step 1: Receive Your Form 1099-OID — By late January or mid-February 2016, your broker or financial institution should mail you Copy B showing OID income for 2015.
Step 2: Review the Key Boxes — Focus on:
- Box 1: OID for taxable corporate and other non-Treasury obligations
- Box 2: Qualified stated interest (periodic interest payments)
- Box 3: Early withdrawal penalties that reduce your taxable income
- Box 8: OID on U.S. Treasury obligations (exempt from state/local tax)
- Box 6: Acquisition premium reducing your OID income
Step 3: Make Necessary Adjustments — If you purchased the bond after its original issue date at a premium or with acquisition premium, you may need to recalculate OID using IRS Publication 1212 or consult a tax professional. The amount on your 1099-OID might not reflect your personal situation. IRS.gov
Step 4: Report on Your Tax Return — Enter OID amounts on Schedule B (Interest and Ordinary Dividends):
- Line 1: Add amounts from Box 1 and Box 8
- Line 3: Include any early withdrawal penalty from Box 3 (this reduces taxable income)
- Follow Schedule B instructions for reporting adjustments
Step 5: Keep Records — Retain your Form 1099-OID and any purchase confirmations showing acquisition dates and prices for at least three years after filing, or longer if you still hold the debt instrument.
For Payers (Brokers and Financial Institutions)
Step 1: Identify Reportable OID Obligations — Use IRS Publication 1212 OID tables to determine which publicly offered debt instruments require reporting. IRS.gov
Step 2: Calculate Reportable OID — For obligations held the entire year, use the annual OID listed in Publication 1212 (adjusted for actual principal amounts). For partial-year holdings, calculate daily OID and multiply by days held during each accrual period.
Step 3: Prepare Forms by January 31 — Complete Form 1099-OID for each recipient showing all required information including recipient TIN, payer information, and amounts in appropriate boxes.
Step 4: File with IRS — Submit Copy A forms with Form 1096 transmittal by February 29 (paper) or March 31 (electronic) of the following year.
Step 5: Handle Corrections Promptly — File corrected forms as soon as errors are discovered, checking the "CORRECTED" box at the top of the form.
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring Form 1099-OID Entirely
Many taxpayers mistakenly believe that since they didn't receive actual interest payments, they don't need to report OID income. Solution: Always report all amounts shown on Form 1099-OID—OID is taxable whether or not you received cash.
Mistake #2: Incorrect Taxpayer Identification Numbers
Mismatches between the name and TIN on Form 1099-OID and IRS records trigger backup withholding and IRS notices. Solution: Ensure your broker has your correct Social Security Number or Employer Identification Number and that it matches your tax return exactly.
Mistake #3: Failing to Adjust for Acquisition Premium
If you bought a bond between interest payment dates at a price higher than its adjusted issue price, Box 6 should show acquisition premium that reduces your taxable OID. Some taxpayers overlook this adjustment. Solution: Verify Box 6 amounts and ensure your tax software properly reduces OID income by acquisition premium. IRS.gov
Mistake #4: Double-Reporting Interest
Some taxpayers receive both Form 1099-INT and Form 1099-OID for the same obligation and mistakenly report both, inflating their income. Solution: Check whether qualified stated interest in Box 2 of Form 1099-OID was also reported on Form 1099-INT—report it only once.
Mistake #5: Not Accounting for Early Withdrawal Penalties
Box 3 shows forfeited interest or principal from early CD withdrawals, which is deductible. Solution: Report this amount on Schedule 1 (Form 1040), line 30 (for 2015) as a penalty for early withdrawal, reducing your adjusted gross income.
Mistake #6: Incorrect Bond Premium Treatment
For bonds purchased at a premium (price above all future payments), taxpayers sometimes fail to properly amortize premium, overstating taxable income. Solution: Review Box 10 for bond premium amortization on covered securities, and for non-covered securities, calculate amortization manually or with professional help.
Mistake #7: State Tax Reporting Errors for Treasury OID
OID on U.S. Treasury obligations (Box 8) is exempt from state and local income taxes but must still be included in federal taxable income. Solution: Report Box 8 amounts separately on your federal return and follow your state's instructions for subtracting exempt U.S. government interest.
Mistake #8: Missing Nominee Reporting
If you hold an OID obligation as a nominee (in your name but for someone else's benefit), you must file Form 1099-OID for the actual owner and may need to submit Form 1096. Solution: Understand nominee responsibilities and file required forms to avoid penalties.
What Happens After You File
For Recipients
Immediate Processing: Once you file your 2015 tax return including OID income, the IRS's systems match the income reported on your Schedule B against Forms 1099-OID filed by payers. This computerized matching typically occurs within 18-24 months after the filing deadline.
If Everything Matches: You'll hear nothing from the IRS—no news is good news. Your return proceeds through normal processing, and any refund is issued according to standard timelines.
If There's a Mismatch: The IRS may send you a CP2000 notice (Proposed Changes to Your Tax Return) indicating underreported income. You typically have 30 days to respond by either:
- Agreeing and paying additional tax, interest, and penalties
- Disagreeing and providing documentation (such as corrected 1099-OID forms or proof of proper adjustments)
- Requesting additional time to gather information
Basis Tracking: Each year's OID income increases your tax basis in the debt instrument. This is crucial because when you eventually sell or redeem the bond, your capital gain or loss is calculated using this adjusted basis. Keep records of cumulative OID reported each year to avoid overpaying tax upon disposition.
For Payers
IRS Receipt: After electronic filing, payers receive acknowledgment within 24-48 hours. Paper forms take several weeks to process.
Error Notifications: The IRS may notify payers of rejected or accepted-with-errors submissions, typically due to TIN mismatches or formatting problems. These require prompt correction and resubmission.
TIN Matching Programs: The IRS offers TIN Matching services allowing payers to verify recipient information before filing, reducing errors and subsequent backup withholding requirements.
Three-Year Retention: Payers must keep copies of all Forms 1099-OID and supporting documentation for at least three years from the due date of the forms.
Penalty Assessment: Failure to file correct Forms 1099-OID timely can result in penalties ranging from $50 to $270 per form (2015 amounts), depending on how late the correction occurs, with maximum annual penalties potentially reaching over $1 million for large payers.
FAQs
1. What's the difference between Form 1099-INT and Form 1099-OID?
Form 1099-INT reports regular interest paid to you—the cash you actually receive in your account. Form 1099-OID reports "phantom income"—interest that's building up (accruing) over time but that you won't actually receive until the bond matures or is sold. Think of 1099-INT as interest you can spend now, and 1099-OID as interest being added to your bond's value that you'll get later. However, both are taxable in the year they're reported.
2. Do I have to pay tax on OID even though I didn't receive any money?
Yes. OID represents interest accruing on your investment each year, and the IRS requires you to report it as taxable income annually, regardless of whether you received cash. This is sometimes called "phantom income." The benefit comes later: since you've already paid tax on the OID, your basis in the bond increases, reducing the taxable gain (or increasing the loss) when you eventually sell or redeem it.
3. I bought my bond from another investor (not at original issue). Is my 1099-OID amount correct?
Possibly not. The Form 1099-OID typically shows OID as if you owned the bond from its original issue date. If you purchased after original issue, especially at a premium (price above adjusted issue price), you may need to recalculate your reportable OID using acquisition premium adjustments. IRS Publication 1212 provides detailed instructions, or consult a tax professional. If you paid more than the sum of all remaining payments, you purchased at a premium and may not owe any OID tax at all. IRS.gov
4. Can I choose not to report OID until I actually sell the bond or it matures?
No. The tax law requires annual reporting of OID as it accrues. However, there's a special election under section 1272-3 that allows you to treat all interest on the debt instrument (including qualified stated interest) as OID reported under the constant yield method. This election must be made for the first taxable year you hold the instrument and applies to all similar instruments you acquire that year and later. This generally doesn't defer income—it just changes how it's calculated.
5. What should I do if I receive a corrected Form 1099-OID after filing my tax return?
First, compare the corrected form to your original. If the correction increases your income, you should file Form 1040X (Amended U.S. Individual Income Tax Return) to report the additional income and pay any tax owed, plus interest. If the correction decreases your income and would result in a refund, you can choose to file Form 1040X or simply keep the corrected form with your records. You have three years from the original filing deadline to claim a refund via amended return.
6. Are there any OID obligations that are tax-exempt?
Yes. Municipal bonds and other debt instruments issued by state and local governments may have OID that's exempt from federal income tax (and sometimes state tax if you live in the issuing state). However, for 2015, the IRS did not require information reporting of tax-exempt OID, so you typically won't receive a Form 1099-OID for these obligations. You may still need to report tax-exempt OID on your return for alternative minimum tax (AMT) calculations if it's from specified private activity bonds.
7. I received Form 1099-OID for a REMIC (Real Estate Mortgage Investment Conduit). Are there special rules?
Yes. REMICs have unique reporting requirements. Box 9 on your Form 1099-OID may show investment expenses that, as of 2015, were subject to the 2% AGI limitation as miscellaneous itemized deductions. REMIC OID is generally reported in Box 1, while regular interest appears in Box 2. Due to the complexity of REMIC taxation, including potential excess inclusions, consider consulting a tax professional if you hold REMIC interests.
Sources
Sources: All information in this guide is derived from official IRS publications and instructions, specifically the 2015 Instructions for Forms 1099-INT and 1099-OID, Publication 1212 (Guide to Original Issue Discount), and the IRS Form 1099-OID page.
