Form 1099-OID: Original Issue Discount (2021) - Complete Guide
What Form 1099-OID Is For
Form 1099-OID is a tax document that reports a special type of interest income called ""Original Issue Discount"" (OID). Think of OID as interest that you earn gradually over time on certain bonds and debt investments that were originally sold for less than their face value at maturity. IRS.gov
In simple terms, if you bought a bond for $900 that will pay you $1,000 when it matures, that $100 difference is OID—and the IRS considers it taxable interest income that you must report each year, even though you haven't actually received the money yet. Common investments that generate OID include zero-coupon bonds (bonds that pay no regular interest), certain corporate bonds, Treasury securities like STRIPS (Separate Trading of Registered Interest and Principal of Securities), and long-term certificates of deposit issued at a discount.
You'll receive Form 1099-OID from your broker, bank, or other financial institution if your OID income for the year was at least $10. The form shows how much OID ""accrued"" (accumulated) while you owned the investment during 2021, and this amount must be reported on your tax return as taxable income, similar to regular interest. IRS Instructions for Forms 1099-INT and 1099-OID
When You’d Use Form 1099-OID (Late/Amended Filing)
For the 2021 tax year, most taxpayers would have received their Form 1099-OID by January 31, 2022, and used it when filing their 2021 tax return by the April 18, 2022 deadline (which was extended from the usual April 15 due to a weekend and holiday).
However, there are several situations where late or amended filing comes into play:
Late Filing
If you missed the original April 2022 deadline, you should file as soon as possible. The IRS charges a failure-to-file penalty of 5% of unpaid taxes for each month your return is late, capping at 25%. Interest also accumulates on any unpaid balance from the original due date. There's no statute of limitations on unfiled returns—the clock only starts when you actually file.
Corrected Forms
Sometimes financial institutions discover errors and send a corrected Form 1099-OID (marked ""CORRECTED"" at the top). If this affects your tax liability, you'll need to file an amended return using Form 1040-X within three years of your original filing date or two years from when you paid the tax, whichever is later. For 2021 returns filed by April 2022, this means you generally have until April 2025 to amend. IRS Publication 1212
Missing Forms
If you never received a Form 1099-OID but owned OID debt instruments in 2021, you're still required to calculate and report the income. You can use IRS Publication 1212's OID tables or contact your broker for the information. The IRS matches 1099 forms to tax returns, so omitting this income will likely trigger a notice.
Key Rules for 2021
Several important rules governed Form 1099-OID for the 2021 tax year:
Minimum Reporting Threshold
Financial institutions must issue Form 1099-OID if your OID income was at least $10 for the year, or if any foreign tax was withheld, or if federal income tax was withheld under backup withholding rules (even if OID was less than $10). IRS.gov
Accrual Method
Unlike regular interest that you report when received, OID is taxed on an accrual basis. This means you report it as it accumulates over time, regardless of whether you actually received any cash payments. The calculation uses the ""constant yield method,"" which spreads the discount proportionally over the life of the instrument.
Box Distinctions
Form 1099-OID has several important boxes. Box 1 shows OID on corporate and other taxable bonds. Box 8 reports OID on U.S. Treasury obligations (which is exempt from state and local taxes but federally taxable). Box 11 shows OID on tax-exempt state or municipal bonds (which you must still track to adjust your cost basis, even though it's not taxable income). Box 2 reports any regular stated interest paid on the same instrument.
De Minimis Rule
If the OID is less than one-quarter of 1% (0.0025) of the stated redemption price at maturity, multiplied by the number of full years to maturity, the IRS treats the OID as zero for tax purposes. This mainly affects bonds purchased at a very small discount.
Acquisition Premium and Bond Premium
If you purchased an OID bond after its original issue for more than its adjusted issue price (but less than its face value), you may have ""acquisition premium"" that reduces your reportable OID. If you paid more than the bond's face value, you have ""bond premium,"" which may eliminate OID reporting entirely. Your broker should calculate these adjustments for covered securities and report net amounts on the form.
Step-by-Step (High Level)
Here's how Form 1099-OID works in practice:
Step 1 - Receive the Form
By late January or early February (January 31, 2022 for 2021), you should receive Form 1099-OID from each institution that paid or credited you OID income of $10 or more. Review it carefully for accuracy, checking that your name, Social Security number, and account information are correct.
Step 2 - Understand the Boxes
Look at the key boxes. Box 1 or Box 8 will show your taxable OID income. Box 2 shows any regular interest (also taxable). Box 3 shows early withdrawal penalties (which reduce your taxable income). Box 6 shows acquisition premium adjustments. Box 11 shows tax-exempt OID (for informational purposes to adjust your basis).
Step 3 - Gather All Forms
Collect all your Forms 1099-OID if you held multiple OID instruments across different accounts or institutions. Each form may report OID from different investments.
Step 4 - Report on Your Tax Return
When preparing your 2021 Form 1040, report OID income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500, or directly on Form 1040, Line 2b if below that threshold. OID from Box 1 gets added to your other taxable interest. Treasury OID from Box 8 goes on the same line but may require a separate note if you have state taxes to file.
Step 5 - Adjust for Special Circumstances
If you sold the OID instrument before maturity, you'll also need to report the sale on Schedule D (Capital Gains and Losses) or Form 8949. Your basis in the bond increases by the cumulative OID you've reported in prior years, which affects your capital gain or loss calculation.
Step 6 - Keep Records
Retain copies of all Forms 1099-OID along with your tax return for at least three years. You'll need these for future reference, especially to track your adjusted cost basis if you hold the investment across multiple tax years.
Common Mistakes and How to Avoid Them
Many taxpayers and even some financial institutions make errors with Form 1099-OID. Here are the most frequent mistakes and how to prevent them:
Mistake #1 - Ignoring the Form Entirely
Some taxpayers think because they didn't receive cash, they don't owe taxes. This is wrong. OID is taxable as it accrues, regardless of cash payments. Solution: Report all OID income shown on Form 1099-OID, even if you received no actual money that year.
Mistake #2 - Double-Counting Income
When you sell an OID bond, some taxpayers report both the full OID shown on Form 1099-OID and the full proceeds on Schedule D, essentially taxing the same income twice. Solution: Remember that your cost basis increases by the cumulative OID you've reported. When selling, add all previously reported OID to your original purchase price to calculate the correct gain or loss.
Mistake #3 - Incorrect Box Usage
Taxpayers sometimes report OID from Box 8 (Treasury obligations) together with general interest without noting the state tax exemption, causing errors on state returns. Solution: Keep Treasury OID separate on state returns since it's state-tax-exempt in most states.
Mistake #4 - Forgetting Nominee Situations
If you received a Form 1099-OID for an account where someone else is the actual owner (like a joint account where you're a nominee), you must file your own Form 1099-OID for the true owner with the IRS and give them a copy. Solution: Consult a tax professional if you hold OID investments as a nominee for others.
Mistake #5 - Not Adjusting for Acquisition Premium
If you bought an OID bond on the secondary market at a premium price, your broker should reduce the OID reported. If your form doesn't show this adjustment in Box 6 (or shows an incorrect amount), you could overpay taxes. Solution: Verify with your broker that acquisition premium adjustments are properly calculated for covered securities purchased after 2014.
Mistake #6 - Missing the Premium Amortization
If Box 10 shows bond premium amortization but Box 2 shows gross interest, you need to subtract the premium from the interest—not report both at face value. Solution: Read the form instructions carefully and understand whether amounts are reported ""net"" or ""gross.""
Mistake #7 - Late or Missing Corrected Forms
If you file your return early and then receive a corrected Form 1099-OID later, failing to file an amended return can trigger IRS notices and penalties. Solution: Wait until mid-February to file if you have complex investment accounts prone to corrections.
What Happens After You File
Once you've filed your 2021 tax return including Form 1099-OID information, several things occur:
IRS Matching Process
The IRS receives copies of all Forms 1099-OID from financial institutions and uses automated systems to match them against your tax return. This matching typically happens 12-18 months after filing. If there's a discrepancy—for example, a Form 1099-OID shows $500 of OID but your return only reports $400—the IRS will send you a CP2000 notice proposing additional tax, penalties, and interest.
State Tax Returns
Most states that have income taxes also require reporting of OID income. However, OID from U.S. Treasury obligations (Box 8) is generally exempt from state income tax, while other OID (Box 1) is usually fully taxable at the state level. If you filed state returns for 2021, you would have needed to properly categorize these amounts.
Ongoing Basis Tracking
Your financial records should reflect the cumulative OID reported each year. This increased basis is crucial for calculating capital gains or losses when you eventually sell or redeem the investment. Financial institutions track this for ""covered securities"" (generally purchased after 2014), but you're responsible for maintaining records for older investments.
Potential Notices
Besides the matching notices mentioned above, you might receive notices if: (1) your Social Security number doesn't match IRS records, (2) you're subject to backup withholding that wasn't properly applied, or (3) the IRS identifies computational errors in how you reported OID income.
Refund or Payment Impact
The OID reported on your Form 1099-OID directly affects your tax liability. If it was the only change from prior years, it could reduce your expected refund or increase your tax owed. Interest compounds daily on any unpaid balance from the April filing deadline.
Future Year Implications
Each year you hold an OID instrument, you'll receive a new Form 1099-OID for that year's accrued discount. Over time, the cumulative OID you report will eventually equal the total discount on the bond (the difference between what you paid and what you'll receive at maturity).
FAQs
Q1: Do I have to pay tax on OID if I never received any money?
Yes. OID is taxed on an accrual basis, meaning you report it annually as it accumulates, even if the bond pays no cash until maturity. This is one of the unique features of OID taxation—you pay ""phantom income"" tax on money you haven't received yet. The IRS requires this because the discount represents interest being earned over the life of the bond. When you eventually receive your money at maturity, you won't pay tax again because your basis has increased by all the OID you've already reported. IRS Publication 1212
Q2: What if my Form 1099-OID shows amounts that seem incorrect?
First, contact your broker or financial institution to verify the amounts. For covered securities (generally purchased after 2014), they're required to track and report OID accurately, including adjustments for acquisition premium or market discount. If you believe the form is genuinely incorrect, request a corrected form. Don't simply report different numbers than what's shown—the IRS matches forms to returns, and mismatches trigger notices. If you have a legitimate reason for reporting different amounts (like computing OID yourself for an uncovered security), include an explanation with your return or consult a tax professional. IRS.gov
Q3: What's the difference between Boxes 1 and 8 on Form 1099-OID?
Box 1 reports OID on corporate bonds, certificates of deposit, and other taxable obligations (excluding Treasury securities). Box 8 specifically reports OID on U.S. Treasury obligations like Treasury notes, bonds, and STRIPS. This separation matters because Treasury OID is exempt from state and local income taxes in most states, while Box 1 OID is generally fully taxable at all levels. Both boxes report federally taxable income. When preparing state returns, you'll typically subtract Box 8 amounts from your taxable interest while keeping Box 1 amounts fully taxable.
Q4: I sold my OID bond before maturity in 2021. How do I report this?
You'll need to report both the OID income and the sale. First, report the OID shown on Form 1099-OID as interest income on Schedule B (or Form 1040 Line 2b). Then, report the sale on Form 8949 and Schedule D as a capital gain or loss transaction. Your cost basis for the sale equals your original purchase price plus all OID you've reported in the current year and previous years, minus any payments received. This increased basis typically reduces your capital gain (or increases your loss). Don't forget this adjustment—it's a common error that leads to overpaying capital gains tax.
Q5: What happens if I never received my Form 1099-OID?
You're still required to report the OID income even if you didn't receive the form. Contact your financial institution to request a copy—they're required to furnish statements to recipients by January 31. If you can't obtain a copy, you can calculate OID yourself using IRS Publication 1212's OID tables (available on IRS.gov) or the constant yield method described in the publication. The IRS receives copies of all Forms 1099-OID issued, so they expect to see this income on your return. Missing it could result in an underreporting notice with additional tax, penalties, and interest.
Q6: Are there any penalties for filing Form 1099-OID late or incorrectly?
For taxpayers who receive the form, there's no direct penalty for ""filing"" it late since you don't file it—you just report the income on your tax return. However, if you file your tax return late and owe taxes, you'll face failure-to-file penalties (5% per month, up to 25%) and interest. For financial institutions required to issue Form 1099-OID, penalties range from $60 to $330 per form depending on how late they file, with a maximum penalty of $660 per form (or 10% of the OID amount) for intentional disregard of filing requirements. If you receive a corrected form and need to amend your return, file Form 1040-X as soon as possible to minimize interest charges. IRS Information Return Penalties
Q7: How does OID differ from regular interest, and can I have both on the same investment?
OID represents the discount built into a bond when it's issued below face value—essentially prepaid interest that accrues over time. Regular interest (called ""qualified stated interest"") consists of periodic cash payments you actually receive. Many OID bonds pay both: they're issued at a discount (generating OID) and also pay some regular interest. In these cases, Box 1 or 8 shows the OID, while Box 2 shows the stated interest—both are taxable. Zero-coupon bonds pay only OID with no stated interest. The key difference is timing: OID is reported as it accrues even without payment, while stated interest is reported when paid or credited to your account.
Sources
- IRS Form 1099-OID Information
- IRS Instructions for Forms 1099-INT and 1099-OID
- IRS Publication 1212: Guide to Original Issue Discount
- IRS Information Return Penalties
