Form 1099-OID Original Issue Discount: A Complete Guide for 2016
What Form 1099-OID Is For
Form 1099-OID reports Original Issue Discount (OID) income to the IRS and to you, the taxpayer. But what exactly is OID? Simply put, it's a type of interest income that occurs when you buy certain debt instruments—like bonds, notes, or certificates of deposit—for less than their face value (the amount you'll receive when they mature).
Here's an everyday example: Imagine you buy a bond for $950 that will pay you $1,000 when it matures in five years. That $50 difference is the OID, and the IRS considers it interest income that you must report each year, even though you won't actually receive the money until the bond matures.
The form is issued by banks, brokerage firms, bond issuers, and other financial institutions when you earn at least $10 in OID during the calendar year. According to the 2016 IRS Instructions, payers must also issue the form if they withheld any federal income tax or foreign tax on OID, regardless of the amount.
Common investments that generate Form 1099-OID include corporate bonds issued at a discount, zero-coupon bonds, certain certificates of deposit with terms longer than one year, Treasury Inflation-Protected Securities (TIPS), and some structured financial products like REMIC (Real Estate Mortgage Investment Conduit) interests.
When You’d Use It (Late/Amended Filing)
You typically receive Form 1099-OID by January 31 following the tax year. For 2016 income, that means you should have received your form by January 31, 2017. You then use this information when filing your federal income tax return, which for most individuals was due April 15, 2017.
But what if you need to file late or amend your return? If you discover an error or receive a corrected Form 1099-OID after filing, you'll need to file an amended return using Form 1040X. Common reasons for amendments include receiving a corrected 1099-OID showing different OID amounts, discovering you failed to report OID income from a form that was lost or misplaced, or realizing you needed to adjust the reported OID due to acquisition premium or other factors.
According to IRS guidelines, you generally have three years from the original filing deadline to file an amended return and claim a refund. For 2016 tax returns, that deadline would have been April 15, 2020.
If you never filed your 2016 return and owe taxes, there's no statute of limitations—you should file as soon as possible to minimize penalties and interest. The IRS imposes a failure-to-file penalty of 5% of unpaid taxes per month, up to 25%, plus interest on the unpaid amount.
Key Rules or Details for 2016
The $10 Reporting Threshold
Payers must issue Form 1099-OID if you received at least $10 in OID during the year. However, as the 2016 Instructions emphasize, you must report all taxable OID on your tax return, even if you didn't receive a form because the amount was less than $10.
Accrual vs. Cash
Unlike regular interest that you report when you receive it, OID follows accrual accounting. You must include OID in your income each year as it accrues, whether or not you receive any actual payments. This is one of the most misunderstood aspects of OID reporting.
Box 1 vs. Box 8
The form has two main reporting boxes. Box 1 shows OID on regular corporate and other taxable obligations, while Box 8 reports OID specifically on U.S. Treasury obligations. This distinction matters because Treasury OID is exempt from state and local income taxes, though it's fully taxable on your federal return.
Covered vs. Noncovered Securities
For bonds purchased in 2016, many were "covered securities" under cost basis reporting rules. For covered securities acquired with acquisition premium (when you paid more than the adjusted issue price but less than face value), your broker may report either the gross OID amount plus the premium adjustment in separate boxes, or a net OID figure already adjusted for the premium.
Bond Premium Reporting
Box 10 on the 2016 form reported bond premium amortization. If you bought a taxable bond at a premium (paying more than face value) and chose to amortize the premium, this amount offsets your interest income.
Backup Withholding
If you didn't provide your taxpayer identification number to the payer, they may have withheld 28% of your OID under backup withholding rules. This appears in Box 4 and can be claimed as a tax payment on your return.
Step-by-Step (High Level)
Overview
Here's how to handle Form 1099-OID when preparing your 2016 tax return:
Step 1: Gather All Forms
Collect every Form 1099-OID you received from all financial institutions. You might have multiple forms if you held bonds at different brokers or owned several different debt instruments.
Step 2: Review Each Form Carefully
Check that your name, address, and taxpayer identification number are correct. Verify the amounts seem reasonable based on your bond holdings. Look specifically at Boxes 1 (OID for regular obligations), 2 (other periodic interest), 8 (OID on U.S. Treasury obligations), and 4 (backup withholding).
Step 3: Determine if Adjustments Are Needed
This is critical: You may need to adjust the amounts reported on Form 1099-OID if you bought the bond after its original issue and paid an acquisition premium, or if the debt instrument is a stripped bond or stripped coupon. IRS Publication 550 provides detailed calculation methods, or you can use IRS Publication 1212 which lists OID information for many publicly traded bonds.
Step 4: Report on Your Tax Return
For Form 1040 filers, report the total OID from Box 1 and Box 8 (combined) as interest income on Schedule B, Part I if your total interest exceeds $1,500, or directly on Form 1040, line 8a if it's less. Also include any stated interest from Box 2. If you made adjustments to the reported amounts, include an explanation statement with your return.
Step 5: Claim Any Withholding
If Box 4 shows backup withholding, include this amount with your other tax payments on Form 1040, line 64 (for 2016 returns).
Step 6: Adjust Your Basis
This step is often forgotten but important: increase your basis in the bond by the amount of OID you included in income. This prevents you from being taxed twice—once on the annual OID and again when you sell or redeem the bond. Keep careful records for each year you hold the bond.
Common Mistakes and How to Avoid Them
Mistake 1: Blindly Reporting the Box 1 Amount
Many taxpayers simply copy the Box 1 or Box 8 figure onto their tax return without considering adjustments. If you bought your bond after original issue at a premium or acquisition premium, the amount you must report as income is likely less than what's shown on the form. Take time to determine if adjustments apply to your situation, or consult a tax professional.
Mistake 2: Ignoring OID When No Form Was Received
Some taxpayers assume if they didn't receive a 1099-OID, they don't have to report the income. Wrong. According to IRS rules, you must report all taxable OID even if you don't receive a form. This often happens with bonds purchased on the secondary market or smaller financial institutions that fail to issue forms.
Mistake 3: Failing to Report as a Nominee
If you receive a Form 1099-OID for a bond you own jointly with someone else, or for an account where you're not the actual owner, you're considered a "nominee." You must issue a separate Form 1099-OID to the actual owner, file it with the IRS, and report only your portion on your return. Spouses don't need to issue nominee returns for amounts owned by the other spouse.
Mistake 4: Forgetting About Basis Adjustments
Each year you include OID in income, you must increase your bond's cost basis by that amount. If you don't track this, you'll overpay taxes when you eventually sell or redeem the bond because your gain will be overstated. Keep detailed records showing your original purchase price plus cumulative OID included in income.
Mistake 5: Missing Box 2 Interest
Box 2 shows "other periodic interest," which is stated interest separate from OID. This is also taxable and must be included in your interest income. Don't focus so much on the OID that you overlook this additional income.
Mistake 6: Misunderstanding Treasury Obligations
OID on U.S. Treasury obligations (Box 8) is exempt from state and local taxes but fully taxable on your federal return. Some taxpayers mistakenly treat it as entirely tax-exempt. Conversely, make sure your state return excludes this amount.
What Happens After You File
IRS Matching Program
The IRS runs a sophisticated computer matching program that compares the 1099-OID forms sent by payers against the income you reported on your tax return. If there's a discrepancy—you reported less OID than appears on the forms the IRS received—you'll likely receive a CP2000 notice, typically 12-18 months after filing. This isn't an audit, but rather a proposal to change your return and assess additional tax, penalties, and interest.
Responding to CP2000 Notices
If you receive a CP2000 related to Form 1099-OID, don't panic. If the IRS is correct and you underreported income, pay the additional amount to minimize interest charges. However, if you made a legitimate adjustment (such as for acquisition premium) that you didn't explain on your original return, respond with a detailed explanation and documentation showing why your reported amount was correct. You typically have 30 days to respond.
Ongoing Record-Keeping
Continue tracking your bond basis for each year you hold the instrument. When you eventually sell or redeem the bond, you'll report the transaction on Form 8949 and Schedule D. Your adjusted basis (original cost plus all OID included in income over the years) determines your capital gain or loss.
State Tax Returns
Don't forget about state taxes. While most states tax OID the same as federal, Treasury OID (Box 8) is usually exempt from state taxation. Check your state's specific rules.
Future Tax Years
If you continue holding the same bonds into future years, you'll receive new Forms 1099-OID annually. The process repeats each year until the bonds mature or you sell them.
FAQs
Q: I bought a CD that matures in 18 months. Will I get a Form 1099-OID?
A: Maybe. If your CD was issued at a discount (meaning you paid less than you'll receive at maturity) and has a term of more than one year, you should receive Form 1099-OID reporting the annual OID. However, most consumer CDs are issued at face value and pay regular interest, which would be reported on Form 1099-INT instead.
Q: What if the amount on my Form 1099-OID seems too high?
A: This often happens when you purchased a bond mid-year on the secondary market. The form might show a full year's OID even though you only owned it for part of the year, or it might not account for any acquisition premium you paid. Check IRS Publication 1212 or consult a tax professional to calculate your correct OID amount.
Q: Do I owe tax on OID even though I didn't receive any cash?
A: Yes, unfortunately. OID is taxed on an accrual basis, meaning you owe tax on it each year as it accrues, even though you won't receive the money until the bond matures. This is sometimes called "phantom income." Make sure you have funds available to pay the tax, or consider investing in instruments that pay current interest instead of zero-coupon bonds.
Q: I sold my bond mid-year. Do I report the full year's OID?
A: No. You only report OID for the period you actually owned the bond. If your Form 1099-OID shows a full year but you sold in June, you'll need to prorate the amount. Additionally, the buyer will report OID for the period they owned the bond. The buyer and seller aren't required to issue nominee forms to each other for this situation.
Q: What's the difference between Form 1099-OID and Form 1099-INT?
A: Form 1099-INT reports regular interest income that you receive during the year, like interest from savings accounts, bonds paying current interest, and most CDs. Form 1099-OID reports a specific type of interest—original issue discount—that accrues on bonds issued at a discount. Some bonds generate both forms, while others generate only one.
Q: Can I deduct anything to offset my Form 1099-OID income?
A: Box 3 shows any early withdrawal penalties, which are deductible as an adjustment to income on Form 1040. Box 10 shows bond premium amortization, which offsets your interest income. Investment expenses for certain REMIC interests appear in Box 9 and may be deductible as a miscellaneous itemized deduction (subject to the 2% floor, which was eliminated for tax years after 2017 by tax reform).
Q: I lost my Form 1099-OID. What should I do?
A: First, contact the issuer or your broker to request a duplicate copy. They're required to provide one. If that fails, you can calculate the OID yourself using IRS Publication 1212 for publicly traded instruments. For private placements or hard-to-find information, consult a tax professional. Remember, you're required to report the income even without the form.
For more information, visit the official IRS resources: Form 1099-OID page, 2016 Instructions for Forms 1099-INT and 1099-OID, and Publication 550 - Investment Income and Expenses.
