John M. Hoffman & Associates CPAs

Frequently Asked Questions

Investment Income (Interest & Dividends)

 

What is OID (original Issue discount)?

If a bond is issued for less than its maturity face amount, and that less than face amount is the ultimate interest that the holder earns, that income is earned ratably over the term of the bond. The amount of that earning is reported as original issue discount or "OID".

OID is common with zero coupon treasury securities. Zero coupon means that the bond issuer does not send interest payments every six months but instead, the purchaser buys the bond at a discount to the face value, that discount being the interest. It is also very common with to see OID with municipal bonds. It is not as common to see OID with taxable corporate bonds.

OID is reported within the 1099 forms (not necessarily on the first page) that the financial institutions provide (another reason we like to get the originals of those forms).

Let's say that you purchase a $10,000 U.S. Treasury Zero coupon bond that is due in 5 years for $8,000. In five years you will receive $10,000. The $2,000 is earned ratably during the term of the bond. It is not quite earned evenly ($400 per year) but ratably instead. In this simple example, you might get a 1099 OID for $380 of U.S. treasury income during the first year. That income (even though you did not receive a check for it) is taxable in year 1. If at the end of the year you sold that bond, your basis for determining gain or loss would be $8,380. If you sold the bond for $8,400 you would have a $20 capital gain.