Understanding Form 1099-OID: Original Issue Discount and Tax Reporting

Investors who hold bonds, Treasury obligations, or other debt instruments may encounter Original Issue Discount (OID), a form of interest income that accrues over time rather than being paid as regular interest. The IRS requires bond issuers to report this income using Form 1099-OID, ensuring that investors properly account for taxable earnings. While OID affects tax liabilities, understanding how it is calculated and reported can help investors manage their tax obligations more efficiently.

If you’re unsure how to navigate OID or other investment income, explore our tax services to ensure you’re filing accurately and optimizing your financial strategy.

What Is Form 1099-OID?

Form 1099-OID (Original Issue Discount) is an IRS tax form used to report interest income earned from certain types of investments, such as:

• Bonds issued below their face value
• Certificates of deposit (CDs) purchased at a discount
• U.S. Treasury obligations with original issue discounts
• Stripped bonds or zero-coupon bonds

The OID is the difference between the discounted purchase price and the bond’s full face value at maturity. The IRS treats this difference as taxable interest income that accrues over the life of the bond, even if you don’t receive interest payments until maturity.

How Does OID Work?

OID occurs when a bond or debt instrument is issued at a price lower than its redemption value. Instead of receiving traditional interest payments, the investor earns income as the bond’s value increases over time.

For example:

• If you purchase a $1,000 bond for $900, the $100 discount is considered OID.
• The IRS requires you to report a portion of that $100 as taxable interest income each year, rather than waiting until the bond matures.

Who Receives a 1099-OID?

You will receive Form 1099-OID if you hold a debt instrument subject to original issue discount (OID) and the total OID amount for the year is at least $10. The issuer is responsible for calculating and reporting the OID amount to both the taxpayer and the IRS.

Issuers must file Form 1099-OID if:

• The OID includible in gross income is at least $10 for the tax year.
• Any foreign tax was withheld and paid on OID income.
• Federal income tax was withheld under backup withholding rules, even if the total OID is less than $10.

This ensures that OID income is properly reported and taxed, regardless of whether the investor has received actual interest payments.

Breaking Down Form 1099-OID: Key Sections Explained

Each Form 1099-OID includes specific details about the taxable interest income you must report. Important fields include:

• Box 1 – Original Issue Discount: Reports the total amount of taxable OID interest accrued during the tax year. This amount must be included as interest income on your tax return. However, depending on the type of debt instrument and other factors, you may need to adjust the reported OID amount using Publication 1212.
• Box 2 – Other Periodic Interest: Shows any qualified stated interest payments made separately from OID income. If you held the obligation for the full year, report this amount as interest income.
• Box 3 – Early Withdrawal Penalty: Displays any forfeited interest or principal if you withdrew money before the maturity date of an obligation, such as from a CD (certificate of deposit). This penalty may be deductible on your tax return.
• Box 4 – Federal Income Tax Withheld: Reports any backup withholding applied if you failed to provide a correct taxpayer identification number (TIN). This amount should be included as tax withheld on your income tax return.
• Box 5 – Market Discount: If applicable, this box shows the market discount accrued on a covered security. If you elected to include market discount in income as it accrues, report this amount on your tax return.
• Box 6 – Acquisition Premium: Reports any acquisition premium amortization that reduces the amount of OID included as taxable interest. This applies to covered securities where the investor paid a premium over the original issue price.
• Box 7 – Description: Identifies the debt instrument associated with the reported OID, which may include a CUSIP number, issuer name, or bond details.
• Box 8 – Original Issue Discount on U.S. Treasury Obligations: Reports OID from U.S. Treasury bonds and notes. This amount is exempt from state and local income taxes but must be included as interest income on federal returns.
• Box 9 – Investment Expenses: If applicable, this box shows your share of investment expenses from a single-class REMIC (Real Estate Mortgage Investment Conduit). 
• Box 10 – Bond Premium: Reports the premium amortization for a taxable covered security, including Treasury Inflation-Protected Securities (TIPS). If an amount is reported here, it may offset taxable interest income.
• Box 11 – Tax-Exempt OID: Reports OID on tax-exempt bonds for covered securities acquired after January 1, 2017. This amount should be reported on Form 1040 or 1040-SR, but it is not subject to federal income tax.
• Boxes 12–14 – State Tax Information: These boxes report state tax withholding details, including state name, state identification number, and any state taxes withheld.

How to Report 1099-OID on Your Tax Return

If you receive Form 1099-OID, you must report the OID income on your federal tax return. Here’s how:

1. Schedule B (Form 1040) – List each payer’s name (such as a brokerage firm) and the amount received from each payer. Include all OID and qualified stated interest shown in boxes 1, 2, and 8 of Form 1099-OID. If you need to adjust the OID amount, report the full OID on Schedule B, Part I, line 1 and make adjustments accordingly​.
   
2. Form 1040 or 1040-SR – Report taxable OID income on the interest income line of Form 1040​.
   
3. OID Adjustments – If the OID reported on Form 1099-OID needs adjustment:
   

• If the adjusted OID is less than the amount on Form 1099-OID, report the adjustment as “OID Adjustment” and subtract the excess from the subtotal.
• If the adjusted OID is more, report the adjustment as “OID Adjustment” and add it to the total interest income​

Common 1099-OID Mistakes to Avoid

Errors when reporting Form 1099-OID can lead to tax miscalculations or IRS notices. Some common mistakes include:

• Ignoring OID income – Even if you don’t receive cash payments, the IRS considers OID taxable interest that must be reported annually.
• Misreporting market discount – If you purchased a bond at a discount, ensure you report any taxable market discount separately from OID income.
• Forgetting AMT adjustments – Certain OID securities may require adjustments for Alternative Minimum Tax (AMT) purposes.
• Overlooking tax-exempt OID – If you have municipal bonds, ensure you separate taxable and tax-exempt OID correctly.

Optimize Your Tax Strategy with Form 1099-OID

Effectively managing Form 1099-OID is essential for reducing tax liabilities and ensuring compliance with IRS regulations. Whether you’re investing in bonds, Treasury obligations, or CDs, understanding how original issue discount (OID) is taxed can help you maximize deductions, avoid common filing errors, and make informed financial decisions. 

Staying organized with your investment documents and aware of IRS reporting requirements allows you to avoid costly mistakes and streamline tax season. With the right approach, you can take control of your OID reporting and keep your financial plans on track.