Contents

Publication 1212 Important Changes ............................ 1

Cat. No. 61273T

Department Important Reminders ......................... 2

of the
Treasury List of Original Introduction ........................................

Structure of the OID List ...................

2

2
Internal
Revenue
Service Issue Discount Debt Instruments Not on the OID
List ................................................ 3

Instruments Information on the OID List ..............

Information for Brokers and Other

3

Middlemen .................................... 3
Short-Term Obligations Redeemed
For use in preparing at Maturity ................................ 3
Long-Term Debt Instruments .......... 3

1997 Returns
Certificates of Deposit ....................
Backup Withholding ........................
4
4
Bearer Bonds and Coupons ........... 5

Information for Owners of OID Debt

Instruments .................................. 5
Form 1099–OID .............................. 6
How To Report OID ........................ 6
Figuring OID on Long-Term Debt
Instruments .............................. 6
Figuring OID on Stripped Bonds and
Coupons ................................... 12

How To Get More Information .......... 14

Explanation of Section I Column

Headings ...................................... 15

Section I–A: Corporate Debt

Instruments Issued Before 1985 16

Section I–B: Corporate Debt

Instruments Issued After 1984 .. 20

Section I–C: Inflation-Indexed Debt

Instruments .................................. 42

Section II: Stripped Components of

U.S. Treasury and
Government-Sponsored
Enterprises ................................... 43

Section III–A: Short-Term U.S.

Treasury Bills .............................. 45

Section III–B: Student Loan

Marketing Association ................ 47

Section III–C: Federal Home Loan

Banks ............................................ 52

Section III–D: Federal National

Mortgage Association ................. 58

Section III–E: Federal Farm Credit

Banks ............................................ 64

Section III–F: Federal Home Loan

Mortgage Corporation ................ 70
Get forms and other information faster and easier by:
Section III–G: Federal Agricultural
COMPUTER Mortgage Corporation ................ 75
• World Wide Web ➤ www.irs.ustreas.gov
• FTP ➤ ftp.irs.ustreas.gov
• IRIS at FedWorld ➤ (703) 321-8020
FAX Important Changes
• From your FAX machine, dial ➤ (703) 368-9694 Contingent payment debt instruments.
See How To Get More Information in this publication. This publication contains a general discussion
of the rules for figuring original issue discount
(OID) on contingent payment debt instru-
ments issued after August 12, 1996. See your modem to dial 1–304– 264–7070. Hold- Form (and Instructions)
Contingent Payment Debt Instruments, later. ers of interests in REMICs and CDOs should
see chapter 1 of Publication 550 for informa- m W–8 Certificate of Foreign Status
tion on REMICs and CDOs. m Schedule B (Form 1040) Interest and
Inflation-indexed debt instruments. This
publication contains a general discussion of Dividend Income
the new rules for figuring original issue dis-
m Schedule D (Form 1040) Capital Gains
count (OID) and stated interest on inflation-
and Losses
indexed debt instruments (including Treasury
Inflation-Indexed Securities). These rules
Introduction m 1096 Annual Summary and Transmittal
apply to inflation-indexed debt instruments The primary purpose of this publication is to of U.S. Information Returns
issued after January 5, 1997. See Inflation- help brokers and other middlemen identify
Indexed Debt Instruments, later. m 1099–B Proceeds From Broker and
publicly offered original issue discount
(OID) debt instruments, which they may hold Barter Exchange Transactions
as nominees for the true owners, so they can m 1099–INT Interest Income
file Forms 1099–OID or Forms 1099–INT as
required. The other purpose is to assist own- m 1099–OID Original Issue Discount
Important Reminders ers of publicly offered OID instruments to de- m 8281 Information Return for Publicly
termine the OID to report on their income tax Offered Original Issue Discount
Individual taxpayer identification number returns. Instruments
(ITIN). The IRS will issue an ITIN to a non- This publication contains a list of OID in-
struments. The information on this list comes See How To Get More Information on
resident or resident alien who does not have page 14 for information about getting these
and is not eligible to get a social security from financial publications and from the
issuers of the debt instruments. Issuers of publications and forms.
number (SSN). To apply for an ITIN, an alien
must file Form W-7 with the IRS. It usually certain publicly offered OID debt instruments
takes about 30 days to get an ITIN. The ITIN must report this information directly to the IRS
is entered wherever an SSN is requested on on Form 8281 within 30 days after the issue
a tax return. If you are required to include date. The information provided on that form
enables the IRS to update this list annually.
Structure of the OID
another person's SSN on your return and that
person does not have one and cannot get (However, see Debt Instruments Not on the
OID List, later.)
List
one, enter that person's ITIN. The list has the following sections.
An ITIN is for tax use only. It does not The information on the OID list has gen-
entitle the holder to social security benefits erally not been verified by an IRS examination
or rulings action. Issuers and their paying • Section I contains publicly offered, long-
or change the holder's employment or immi- term debt instruments. Section I–A lists
gration status under U.S. law. agents should not assume that the informa-
tion has been verified by the IRS as correct. corporate debt instruments issued before
1985. Section I–B lists debt instruments
Change in length of accrual periods. For Issuers should advise the IRS of er- issued after 1984. Section I–C lists
debt instruments issued after April 3, 1994, rors in and omissions from the list in inflation-indexed debt instruments issued
accrual periods used to figure original issue writing at the following address: after January 5, 1997.
discount (OID) may be of any length and may • Section II lists zero coupon instruments
vary in length over the term of the instrument OID Publication Project available through the Department of the
as long as each accrual period is no longer T:FP:P Room 5607 Treasury's STRIPS program and
than one year and all payments are made on Internal Revenue Service government-sponsored enterprises such
the first or last day of an accrual period. 1111 Constitution Ave., N.W. as the Resolution Funding Corporation.
However, the OID listed for these debt in- Washington, D.C. 20224 It also includes instruments backed by
struments in Section I–B has been figured U.S. Treasury securities that represent
using 6-month accrual periods because of ownership interests in those securities.
Brokers and other middlemen can rely on
space limitations. When preparing Forms Brokers and other middlemen may use
this published OID list to determine, for infor-
1099–OID for these instruments, brokers and this list to prepare information returns.
mation reporting purposes, if a debt instru-
other middlemen can use the amounts listed The list is arranged by maturity date.
ment was issued at a discount and the OID
in Section I–B or refigure the OID using the Brokers and other middlemen
to be reported on information returns. How-
actual accrual periods of the instrument. See should not rely on the information in
ever, the following are subject to change upon
Figuring OID, in the discussion on long-term examination by the IRS: Section II of previous editions of Publi-
debt instruments under Information for Bro- cation 1212 to prepare information re-
kers and Other Middle Men, later. turns for 1997.
1) The OID reported by holders on their in-
Owners of these debt instruments
come tax returns, and
OID list available on electronic bulletin should not rely on the OID listed in Sec-
board. 2) Whether an issuer's classification of an tion II to determine (or compare) OID to
instrument as debt for federal income tax be reported on their tax return. The
The original issue discount list at the purposes is correct. amounts listed in Section II are calculated
end of this publication is also avail- without reference to the price or date at
able electronically for the conven- which an owner acquired the debt instru-
ience of brokers and middlemen. You can ment. For information about determining
download the OID list from the electronic the OID on zero coupon instruments to
bulletin board (IRP-BBS) maintained in Useful Items be reported on your tax return, see Fig-
Martinsburg, WV. Using your modem, dial You may want to see: uring OID on Stripped Bonds and Cou-
1–304–264–7070 and follow the instructions. pons, later.
This is not a toll-free call. Publication • Section III contains short-term discount
obligations. Section III–A lists short-term
REMIC and CDO information reporting re- m 515 Withholding of Tax on Nonresi- discount obligations issued by the U.S.
quirements. Brokers and other middlemen dent Aliens and Foreign Corpo- Treasury Department. These generally
must follow special information reporting re- rations are referred to as Treasury bills or T-bills.
quirements for real estate mortgage invest- Sections III–B through III–G contain
ment (REMIC) regular and collateralized debt m 550 Investment Income and Ex- short-term discount obligations issued by
obligations (CDO) interests. The rules are penses the Student Loan Marketing Association,
explained in Publication 938. Federal Home Loan Banks, the Federal
m 938 Real Estate Mortgage Investment National Mortgage Association, Federal
Publication 938 is available from the Conduits (REMICs) Reporting In- Farm Credit Banks, Federal Home Loan
electronics bulletin board (IRP-BBS) formation Mortgage Corporation, and the Federal
maintained in Martinsburg, W V. Use Agricultural Mortgage Corporation.
Page 2
 • The stated or coupon interest rate. chased the obligation at its original issue
(Shown as 0.00 if no annual interest price. A special rule is used to determine the
Debt Instruments payments are provided.) original issue price for information reporting
on U.S. Treasury bills listed in Section III–A.
Not on the OID List • The total OID up to January 1, 1997.
(This information is not available for every
Under this rule, the middleman prepares
The list of debt instruments does not contain Form 1099–INT by using the noncompetitive
instrument.) (weighted average of accepted auction bids)
the following.
• For long-term instruments issued after discount price for the longest-maturity Treas-
• Long-term OID instruments issued before July 1, 1982, the daily OID for the accrual ury bill maturing on that date. This price is
May 28, 1969. periods falling in calendar years 1997 and shown in Section III–A. Information that sup-
1998. plements Section III–A is available semian-
• Short-term obligations, other than the nually from the electronic bulletin board
obligations listed in Section III. • The total OID per $1,000 of principal or (IRP-BBS) maintained in Martinsburg, WV.
• OID debt instruments that matured or maturity value for calendar years 1997 Dial, by modem, 1–304–264–7070.
were entirely called by the issuer before and 1998. A similar rule applies to the short-term
1997. discount obligations issued by the organiza-
See Table 1 on the page preceding Sec-
• Original issue U.S. Treasury notes and tions listed in Sections III–B through III–F.
tion I–A for an explanation of these items.
bonds that are not Treasury Inflation- Example 1. Assume there are 13-week,
Indexed Securities. Section II. This section lists the OID to be 26-week, and 52-week T-bills maturing on the
(These debt instruments are direct obli- reported by brokers and other middlemen for same date as the T-bill being redeemed. The
gations of the U.S. Government. Gener- calendar year 1997 for stripped components price actually paid by the owner cannot be
ally, they contain either de minimis or no of instruments available through the U.S. established by owner or middleman records.
discount at original issue. See U.S. Treasury and government-sponsored enter- In this case, the broker or middleman pre-
Treasury Bills, Notes, and Bonds in prises. (See Structure of the OID List, earlier, pares Form 1099–INT using the noncompet-
chapter 1 of Publication 550 for more in- for more information about these instru- itive discount price (expressed as a percent
formation.) ments.) The amounts listed are per $1,000 of principal) in Section III–A for a 52–week
• U.S. savings bonds. redemption price and are arranged by matu- bill maturing on the same date as the T-bill
rity date. redeemed. The interest reported is the dis-
• Debt instruments issued at a discount by count (per $1,000 of principal) shown for that
states or their political subdivisions. obligation.
Section III. The short-term obligations listed
(These are not subject to the OID infor-
in this section are arranged by maturity date.
mation reporting rules.)
Section III lists the CUSIP number, maturity
• Mortgage-backed securities and mort- date, issue date, noncompetitive issue price Long-Term Debt
gage participation certificates. (as percent of principal), and discount to be Instruments
• REMIC regular interests and CDOs. reported as interest for calendar year 1997
A broker or other middleman who holds a
per $1,000 of redemption price. Brokers and
• Commercial paper and banker's accept- long-term debt instrument as a nominee for
other middlemen should rely on the issue
ances that may have been originally is- the true owner generally must file Form
price information in Section III only if they are
sued at a discount. 1099–OID.
unable to determine the price actually paid
Brokers and other middlemen can rely on
• Obligations issued by tax-exempt organ- by the owner.
Section I of the OID list to determine, for in-
izations. formation reporting purposes:
• Obligations issued at a discount by indi-
viduals. 1) Whether an instrument has OID, and
• Certificates of deposit and other face-
Information for 2) The amount of OID to be reported on the
amount certificates issued at a discount,
including syndicated certificates of de-
Brokers and Form 1099–OID.

posit. Other Middlemen In general, brokers and other middlemen

must report OID on publicly offered, long-term
• Foreign obligations not traded in the The following discussions contain specific in- debt instruments that are listed in Section I.
United States and obligations not issued structions for brokers and other middlemen. They also may report OID on a long-term debt
in the United States. For more information on the topics dis- instrument that is not listed in Section I of the
• OID debt instruments for which no infor- cussed, including penalties for failure to file OID list.
mation was currently available or that (or furnish) required information returns or
were issued in late 1997 after publication statements, see the instructions for Forms How to report. File Form 1099–OID for each
of this list. These will be included in the 1099. holder if the OID to be included in the holder's
next revision of the publication. income totals $10 or more for the calendar
year. Also, file Form 1099–OID when you are
Short-Term Obligations required to deduct and withhold taxes, even
Redeemed at Maturity if the OID is less than $10. See Backup
If a short-term discount obligation is re- Withholding, later.
Information deemed at maturity through a broker or other Furnish a Form 1099–OID to each holder
by February 2, 1998. Forms 1099–OID must
middleman for the true owner, the broker or
on the OID List middleman must report the discount on Form be filed with the IRS by March 2, 1998, ac-
companied by Form 1096.
This section describes the information in each 1099–INT. If the obligation is sold before
maturity, the broker effecting the transaction Form 1099–OID. Form 1099–OID for
part of the list. 1997 must show the following information.
must file Form 1099–B to reflect the gross
Section I. For each publicly offered debt in- proceeds to the seller. The “accrued” discount
to the date of sale is not reported on either
• In box 1, the OID for the actual dates of
strument in Section I, the list contains the ownership of the holder during 1997. To
following information. Form 1099–INT or Form 1099–OID.
determine the amount of OID to report,
When the obligation is redeemed at ma-
see Figuring OID, next.
• The name of the issuer. turity, the purchase price shown on the own-
er's copy of the purchase confirmation receipt • In box 2, the qualified stated interest paid
• The CUSIP number. or similar record, or the price shown in the or credited during the calendar year. In-
• The issue date. transaction records of the middleman, should terest reported here is not reported on
be used to determine the discount to be re- Form 1099–INT. The qualified stated in-
• The maturity date. ported on Form 1099–INT. terest on Treasury Inflation-Indexed Se-
• The issue price expressed as a percent If the owner's purchase price cannot be curities may be reported in box 3 of Form
of principal or of stated redemption price determined, the broker or other middleman 1099–INT instead of box 2 of Form
at maturity. reports the discount as if the owner had pur- 1099–OID.
Page 3
 • In box 3, any interest or principal forfeited inflation-indexed debt instrument, you must Long-term obligations. If no cash payments
because of an early withdrawal that the attach the following statement to the Form are made on a long-term obligation before
recipient can deduct from gross income. 1099–OID you send to the payee. maturity, backup withholding applies only at
Do not reduce the amounts in boxes 1 “If you (the owner) purchased or sold an maturity. The amount subject to withholding
and 2 by the forfeiture. inflation-indexed debt instrument during the is the OID includible in the holder's gross in-
calendar year (other than a purchase at ori- come for the calendar year when the obli-
• In box 4, any backup withholding for this ginal issue), the OID reported to you may be gation matures. The amount to be withheld is
instrument. incorrect. To determine the correct amount limited to the cash paid.
• In box 5, the CUSIP number, if any. If of OID, see Publication 1212.” Registered obligations with cash pay-
there is no CUSIP number, give a de- ments. If a long-term registered obligation
scription of the instrument including the has cash payments before maturity, backup
abbreviation for the stock exchange, the Certificates of Deposit withholding applies when a cash payment is
abbreviation used by the stock exchange Any broker or middleman who holds a bank made. The amount subject to withholding is
for the issuer, the coupon rate, and the certificate of deposit (CD) as a nominee must the total of the qualified stated interest and
year of maturity (e.g., NYSE XYZ 121/2 determine whether the CD has OID and the OID includible in the holder's gross income for
99). If the issuer of the instrument is other amount of OID includible in the income of the the calendar year when the payment is made.
than the payer, show the name of the owner. The broker or middleman must file an If more than one cash payment is made dur-
issuer in this box. information return showing the reportable in- ing the year, the OID subject to withholding
terest and OID, if any, on the CD. These rules form the year must be allocated among the
Figuring OID. You can determine the OID apply whether or not the broker or middleman expected cash payments in the ratio that each
on a long-term debt instrument by using ei- sold the CD to the owner. Report OID on a bears to the total of the expected cash pay-
ther: CD in the same way as OID on other debt ments. For any payment, the amount of re-
instruments. See Short-Term Obligation Re- quired withholding is limited to the cash paid.
1) Section I of the OID list, or deemed at Maturity and Long-Term Debt In- If the payee is not the original holder of the
struments, earlier. obligation, the amount of OID subjected to
2) The Income Tax Regulations.
withholding is the OID includible in the gross
income of all holders during the calendar year
Using Section I. If the holder held the
Backup Withholding (without regard to any amount paid by the
debt instrument for the entire calendar year, A broker or other middleman who reports OID new holder at the time of transfer). The
report the OID shown in Section I for the cal- or interest on Form 1099–OID or Form amount subject to withholding at maturity of
endar year. Because OID is listed for each 1099–INT may be required to apply backup a listed obligation must be determined using
$1,000 of stated redemption price at maturity, withholding to the reportable payment at a the issue price shown in Section I.
you must adjust the OID amount to reflect the 31% rate. The backup withholding tax is de- Bearer obligations with cash payments.
stated redemption price at maturity of the ducted at the time a cash payment is made. If a long-term bearer obligation has cash
holder's debt instrument. For example, if the Backup withholding generally applies in payments before maturity, backup withholding
holder's instrument has $500 of stated re- the following situations. applies when the cash payments are made.
demption price at maturity, report one-half of For payments before maturity, the amount
1) The payee fails to furnish his or her tax- subject to withholding is the qualified stated
the OID shown for the calendar year. payer identification number (TIN) to the
If the holder held the debt instrument for interest (but not any OID) includable in the
middleman. holder's gross income for the calendar year.
less than the entire calendar year, figure the
OID to report as follows. 2) The IRS notifies the middleman that the For a payment at maturity, the amount subject
payee furnished an incorrect TIN. to withholding is the total of any qualified
1) Look up the daily OID amount for the first stated interest paid at maturity and the OID
1997 accrual period during which the 3) The IRS notifies the middleman that the includible in the holder's gross income for the
holder held the instrument. payee is subject to backup withholding. calendar year when the obligation matures.
4) For instruments acquired after 1983: The amount of required withholding at matu-
2) Multiply the daily OID amount by the rity is limited to the cash paid.
number of days in 1997 that the holder a) The payee fails to certify to the
held the instrument during that accrual middleman, under penalties of per-
period. Sales and redemptions. A broker who re-
jury, that he or she is not subject to
ports the gross proceeds from a sale, ex-
3) Repeat steps (1) and (2) for any re- backup withholding under (3)
change, or redemption of a debt instrument
maining 1997 accrual periods during above.
on Form 1099–B may be required to withhold
which the holder held the instrument. b) The payee fails to certify, under 31% of the amount reported. Backup with-
penalties of perjury, that his or her holding applies in the following situations.
4) Add the results in steps (2) and (3) to
determine the holder's OID per $1,000 TIN is correct.
of stated redemption price at maturity. 1) The payee does not give a TIN to the
However, for short-term discount obli- broker.
5) If necessary, adjust the amount of OID gations (other than government obligations),
to reflect the stated redemption price at bearer bond coupons, and U.S. savings 2) The IRS notifies the broker that the
maturity of the holder's debt instrument. bonds, backup withholding applies only if the payee gave an incorrect TIN.
payee does not give the middleman a TIN.
Report the result as OID in box 1 of Form 3) For debt instruments held in an account
1099–OID. Short-term obligations. Backup withholding opened after 1983, the payee does not
Using the Regulations. Instead of using applies OID on a short-term obligation only certify, under penalties of perjury, that
Section I to figure OID, you can use the In- when the OID is paid at maturity. However, the TIN given is correct.
come Tax Regulations under Internal Reve- backup withholding applies to any interest
nue Code sections 1272 through 1275. For payable before maturity when the interest is Foreign person. Backup withholding and
example, under the Regulations, you can use paid or credited. information reporting requirements apply to
monthly accrual periods in figuring OID for a If the holder of a short-term obligation at U.S. source OID, interest, or proceeds from
debt instrument issued after April 3, 1994, maturity is not the original holder and can sale or redemption of an OID instrument,
that provides for monthly payments. (If you establish the purchase price of the obligation, when paid in the United States to a foreign
use Section I–B, the OID is figured using the amount subject to backup withholding person. However, if the person has given the
6–month accrual periods.) must be determined by treating the purchase broker or middleman Form W–8 or an ac-
For a general explanation of the rules for price as the issue price. However, the broker ceptable substitute, the payment are not
figuring OID under the Income Tax regu- can choose to disregard that price if it would subject to backup withholding. A U.S. resident
lations, see Figuring OID on Long-term Debt require significant manual intervention in the is not a foreign person. Form W–8 does not
Instruments under Information for Owners of computer or recordkeeping system used for relieve a broker from backup withholding if the
OID Debt Instruments, later. the obligation. If the purchase price of a listed broker actually knows the payee is a U.S.
Inflation-indexed debt instruments. If obligation is not established or is disregarded, person.
you use Section I-C instead of the Income the broker must use the issue price shown in Backup withholding does not apply to
Tax Regulations to figure the OID on an Section III. payments of U.S. source OID and interest
Page 4
made outside the United States unless the such as the Resolution Funding Corporation. Election to report all interest as OID.
payee is actually knows the person is a U.S. However, the information provided does not Generally, you can elect to treat all interest
person. For information about backup with- cover every situation. More information can on a debt instrument acquired after April 3,
holding on U.S. source amounts paid outside be found in the regulations for Internal Reve- 1994, as OID and include it in gross income
the United States, see Regulations sections nue Code sections 1271 through 1275. by using the constant yield method. See Fig-
35a.9999–3, –3A, –4, and –5. See Publication uring OID under Debt Instruments Issued Af-
515 for general information about withholding Reporting OID. Generally, you report OID ter 1984, later, for information about this
on foreign persons. as it accrues each year, whether or not you method.
receive any payments from the bond issuer. For purposes of this election, interest in-
If you purchase an OID instrument in the cludes stated interest, acquisition discount,
Bearer Bonds and Coupons secondary market and you have “premium” OID, de minimis OID, market discount, de
A broker, financial institution, or other servic- or “acquisition premium” as explained later, minimis market discount, and unstated inter-
ing agency should report the interest paid on you must adjust the OID to report. est, as adjusted by any amortizable bond
a coupon from a bearer bond on a Form premium or acquisition premium. See Regu-
1099–INT identifying the owner of the coupon Exceptions to reporting OID. The rules for lations section 1.1272–3 for more information.
(unless the owner of the coupon is a foreign reporting OID on long-term instruments do not
person) if: apply to the following debt instruments. Purchase after date of original issue. A
debt instrument you purchased after the date
1) The coupon is presented to the servicing 1) Tax-exempt obligations. (However, see of original issue may have premium, acquisi-
agency for collection before the bond Tax-Exempt Bonds and Coupons, later.) tion premium, or market discount. If so, the
matures, and OID reported to you on Form 1099–OID may
2) U.S. savings bonds.
2) The servicing agency does not hold the have to be adjusted. For more information,
3) Obligations issued by individuals before see Showing an OID adjustment in the dis-
bond as a nominee for the true owner.
March 2, 1984. cussion of How To Report OID, later.
Because the servicing agency cannot assume 4) Loans of $10,000 or less between indi- Premium. A debt instrument is purchased
the presenter of the coupon also owns the viduals who are not in the business of at a premium if its adjusted basis immediately
bond, the servicing agency should not report lending money. (The dollar limit includes after purchase is greater than the total of all
OID on the bond on Form 1099–OID. The outstanding prior loans by that individual amounts payable on the instrument after the
coupon may have been “stripped” (separated) to the other individual.) This exception purchase date, other than qualified stated in-
from the bond and separately purchased. does not apply if a principal purpose of terest. If you buy a debt instrument at a pre-
However, if a long-term bearer bond on the loan is to avoid any federal tax. mium, you do not report any OID as ordinary
the OID list in this publication is presented to income.
the servicing agency for redemption upon call See chapter 1 of Publication 550 for in- Acquisition premium. A debt instrument
or maturity the servicing agency should pre- formation about the rules for these and other is purchased at an acquisition premium if:
pare a Form 1099–OID showing the OID for types of discounted instruments such as
that calendar year, as well as any coupon in- short-term and market discount obligations. 1) It is not purchased at a premium, and
terest payments collected at the time of re- Publication 550 also discusses rules for
2) Its adjusted basis immediately after pur-
demption. holders of REMIC interests and CDOs.
chase, including purchase at original is-
sue, is greater than its adjusted issue
Payments outside the United States. Infor- Definition of OID. A long-term debt instru- price.
mation reporting is not required if the payment ment, such as a bond or note, generally has
or collection of portfolio interest or OID on a OID when it is issued for a price less than its Acquisition premium will reduce the OID
bearer bond or coupon is made outside the stated redemption price at maturity (for ex- you report. For information about how to de-
United States to a foreign person, and the ample its principal amount). The OID is the termine the OID to report for instruments on
broker, financial institution, or servicing difference between the stated redemption which you paid an acquisition premium, see
agency is an issuer's agent. See Publication price at maturity and the issue price of the the later discussions, definitions, and exam-
515 for more information on portfolio interest. instrument. OID is a form of interest. All debt ples under Figuring OID on Long-Term Debt
Information reporting also is not required instruments that pay no interest before matu- Instruments. Also see Figuring OID on Long-
for a payment or collection of interest or OID rity (for example, zero coupon bonds) are Term Debt Instruments for definitions of
on a bearer bond or coupon outside the presumed to be issued at a discount. qualified stated interest and adjusted issue
United States by a custodian, nominee, or price.
other agent of the payee if the agent has Issue price. For instruments listed in this Market discount. Market discount arises
documentary evidence that the payee is a publication, the issue price is the initial offer- when a debt instrument purchased in the
foreign person. The agent should disregard ing price to the public (excluding bond houses secondary market has decreased in value
the documentary evidence if the agent actu- and brokers) at which a substantial amount since its issue date, generally because of an
ally knows the payee is not a foreign person. of these instruments was sold. increase in interest rates. An OID bond has
However, information reporting is re- market discount if your adjusted basis in the
quired if the custodian, nominee, or other De minimis rule. You can disregard the OID bond immediately after you acquired it (usu-
agent is a U.S. person, controlled foreign and treat it as zero if the total OID on a debt ally its purchase price) was less than the
corporation, or foreign person at least 50% instrument is less than one-fourth of 1% bond's issue price (defined earlier) plus the
of whose income for the preceding 3-year (.0025) of the stated redemption price at ma- total OID that accrued before you acquired it.
period is effectively connected with the con- turity multiplied by the number of full years When you dispose of the bond, you must
duct of a U.S. trade or business. from the date of original issue to maturity. report the gain due to accrued market dis-
Long-term instruments with de minimis OID count as taxable interest, unless you choose
are not listed in this publication. to report it as it accrues. See Market Discount
Bonds in chapter 1 of Publication 550 for in-
Example 2. You bought at issuance a
Information for 10-year bond with a stated redemption price
formation on how to figure accrued market
discount and for other information about
Owners of OID at maturity of $1,000, issued at $980 with OID
of $20. One-fourth of 1% of $1,000 (stated
market discount bonds. If you elect to use the
constant yield method to figure accrued mar-
Debt Instruments redemption price) times 10 (number of full
years from the date of original issue to matu-
ket discount, also see Figuring OID on Long-
This section of the publication is for persons Term Debt Instruments later in this publica-
rity) equals $25. Under the de minimis rule, tion. The constant yield method of figuring
who prepare their own tax returns. It dis- you can disregard the OID since the $20 dis-
cusses the income tax rules for computing accrued OID, explained in those discussions
count you received is less than $25. under Figuring OID, is also used to figure
and reporting OID on long-term debt instru-
ments. It also includes a similar discussion for Example 3. Assume the same facts as accrued market discount.
stripped bonds and coupons, such as zero Example 2, except the bond was issued at
coupon instruments available through the $950. You must report part of the $50 OID Sale, exchange, or redemption. Generally,
Department of the Treasury's STRIPS pro- each year because the discount is more than you treat your gain or loss from the sale, ex-
gram and government-sponsored enterprises the $25 de minimis figure in Example 2. change, or redemption of a discounted bond
Page 5
or other debt instrument as a capital gain or 1) You bought the debt instrument at a year. Also include any other OID and interest
loss if you held the bond as a capital asset. premium or at an acquisition premium. income for which you did not receive a Form
If you sold the bond through a broker, you 1099.
should receive Form 1099–B or an equivalent 2) The debt instrument is a stripped bond
statement from the broker. Use the Form or coupon (including zero coupon in-
Showing an OID adjustment. If you use
1099–B or other statement and your broker- struments backed by U.S. Treasury se-
Form 1040 to report more or less OID than
age statements to complete Schedule D curities).
shown on Form 1099–OID, list the full OID
(Form 1040). Also, you may need to refigure the OID if on line 1, Part I of Schedule B and follow the
Your gain or loss is the difference between the debt instrument is a contingent payment instructions under (1) or (2), next. If you use
the amount you realized on the sale, ex- or inflation-indexed debt instrument. Form 1040A to report the OID shown on a
change, or redemption and your basis in the See the discussions under Figuring OID Form 1099–OID you received as a nominee
debt instrument. Your basis, generally, is your on Long-Term Debt Instruments or Figuring for the actual owner, list the full OID on line
cost increased by the OID you have included OID on Stripped Bonds and Coupons, later, 1, Part I of Schedule 1 and follow the in-
in income each year you held it (as discussed for the specific computations. structions under (1).
later under Figuring OID on Long-Term Debt
Instruments). To determine your gain or loss 1) If the OID, as adjusted, is less than the
Refiguring periodic interest. If you dis- amount shown on Form 1099–OID,
on a tax-exempt bond, figure your basis in the
posed of a corporate debt instrument or ac- show the adjustment as follows.
bond by adding to your cost the OID you
quired it from another holder during 1997, see
would have included in income if the bond a) Under your last entry on line 1,
the discussion under Bonds Sold Between
had been taxable. subtotal all interest and OID income
Interest Dates in chapter 1 of Publication 550
See chapter 4 of Publication 550 for more listed on line 1.
for information about refiguring the periodic
information about the tax treatment of the sale
interest shown in box 2 of Form 1099–OID. b) Below the subtotal write “Nominee
or redemption of discounted debt instruments.
Distribution” or “OID Adjustment”
Example 4. On November 1, 1994, Larry, Nominee. If you are the holder of an OID and show the OID you are not re-
a calendar year taxpayer, bought a corporate instrument and you receive a Form 1099–OID quired to report.
bond at original issue for $86,235.17. The that shows your taxpayer identification num-
15-year bond matures on October 31, 2009, ber and includes amounts belonging to an- c) Subtract that OID from the subtotal
at a stated redemption price of $100,000. The other person, you are considered a and enter the result on line 2.
bond provides for semiannual payments of “nominee” recipient. You must file another 2) If the OID, as adjusted, is more than the
interest at 10%. Assume the bond is a capital Form 1099–OID for each actual owner, amount shown on Form 1099–OID,
asset in Larry's hands. The bond has showing the OID for the owner. Show the show the adjustment as follows.
$13,764.83 of OID ($100,000 stated redemp- owner of the instrument as the “recipient” and
tion price at maturity less $86,235.17 issue you as the “payer.” a) Under your last entry on line 1,
price). Complete Form 1099–OID and Form 1096 subtotal all interest and OID income
On November 1, 1997, Larry sold the and file the forms with the Internal Revenue listed on line 1.
bond for $90,000. With the OID he will report Service Center for your area. You must also
b) Below the subtotal write “OID Ad-
for the period he held the bond in 1997, Larry give a copy of the Form 1099–OID to the ac-
justment,” and show the additional
has included $1,214.48 of OID in income and tual owner. However, you are not required to
OID.
has increased his basis by that amount to file a nominee return to show payments for
$87,449.65. Larry has realized a gain of your spouse. See the Form 1099 instructions c) Add that OID to the subtotal and
$2,550.35. All of Larry's gain is capital gain. and How to Report Interest Income in chapter enter the result on line 2.
1 of Publication 550 for more information.
When preparing your tax return, follow the
Form 1099–OID instructions in the later discussion under Figuring OID
The issuer of the debt instrument (or your Showing an OID adjustment. on Long-Term Debt
broker, if you purchased or held the instru-
ment through a broker) should give you a Instruments
copy of Form 1099–OID, or a similar state- How To Report OID The rules for figuring OID depend on the date
ment, if the accrued OID for the calendar year Generally, you report your taxable interest the long-term debt instrument was issued.
is $10 or more and the term of the instrument and OID income on line 2, Form 1040EZ; line There are different rules for the following.
is more than one year. Form 1099–OID 8a, Form 1040A; or line 8a, Form 1040.
shows the OID income in box 1. It also shows, 1) Debt instruments issued after 1954 and
in box 2, any periodic interest you must in- Form 1040 or Form 1040A required. Un- before May 28, 1969 (government in-
clude in income. A copy of Form 1099–OID less you are a nominee for the actual owner struments issued before July 2, 1982).
will be sent to the IRS. Do not attach your of the instrument, you must use Form 1040 2) Corporate debt instruments issued after
copy to your tax return. Keep it for your rec- if you are reporting more or less OID than the May 27, 1969, and before July 2, 1982.
ords. amount shown on Form 1099–OID. For ex-
ample, if you paid a premium or an acquisition 3) Debt instruments issued after July 1,
If you are required to file a tax return 1982, and before 1985.
premium when you purchased the debt in-
! and you receive Form 1099–OID
CAUTION showing taxable amounts, you must
strument, you would report less OID than 4) Debt instruments issued after 1984
report these amounts on your return. A 20% shown on Form 1099–OID. Also, you must (other than debt instruments described
accuracy-related penalty may be charged for use Form 1040 if you were subject to the in (5) and (6)).
underpayment of tax due to: early withdrawal penalty.
You must use Form 1040 or Form 1040A 5) Contingent payment debt instruments
1) Negligence or disregard of rules and (you cannot use Form 1040EZ) if either of the issued after August 12, 1996.
regulations, or following applies: 6) Inflation-indexed debt instruments (in-
2) Substantial understatement of tax. cluding Treasury inflation-indexed secu-
1) You received a Form 1099–OID as a
rities) issued after January 5, 1997.
nominee for the actual owner, or
Form 1099–OID not received. If you held 2) Your total interest and OID income for Note. The rules for figuring OID on zero
an OID instrument for 1997 but did not re- the year was more than $400. coupon instruments backed by U.S. Treasury
ceive a Form 1099–OID, refer to the later securities are discussed later under Figuring
discussions under Figuring OID on Long- Where to report. List each payer's name (if OID on Stripped Bonds and Coupons.
Term Debt Instruments for information on the a brokerage firm gave you a Form 1099, list
OID you must report. the brokerage firm as the payer) and the Debt Instruments Issued After
amount received from each payer on line 1 1954 and Before May 28, 1969
Refiguring OID. You must refigure the OID of Schedule 1 (Form 1040A) or line 1 of
shown in box 1 of Form 1099–OID to deter- Schedule B (Form 1040). Include all OID and
(Government Instruments Issued
mine the proper amount to include in income periodic interest shown in boxes 1 and 2 of Before July 2, 1982)
if either of the following applies: any Form 1099–OID you received for the tax For these instruments, you do not include OID
Page 6
in income until the year the instrument is sold, 3) Divide the amount figured in (2) by the Amount for September ($4 × 17 days ÷ 30
exchanged, or redeemed. If a gain results and number of complete months, and any days) ................................................................. $2
the instrument is a capital asset, the OID is part of a month, from the date of your Amount for complete months October through
December ($4 × 3 months) .............................. 12
taxed as ordinary income. The balance of the purchase to the maturity date. Total to include in 1996 income ....................... $14
gain is capital gain. If there is a loss on the
sale of the instrument, the entire loss is a 4) Subtract the amount figured in (3) from
capital loss and no OID is reported. the amount figured in (1). This is the You figure the OID to include in your 1997
The gain taxed as ordinary income when amount of OID to include in income for income as follows:
the instrument is sold, exchanged, or re- each month you hold the instrument
during the year. Amount for complete months January through
deemed generally equals the following February ($4 × 2 months) ................................. $8
amount:
See the discussion under How To Report Amount for March ($4 × 13 days ÷ 31 days) ... 2
Total to include in 1997 income ....................... $10
number of full months you OID, earlier, for information about showing
held the instrument original issue an adjustment for OID on your return. You increase your basis in the bond by the
X discount OID you include in income. Your basis in the
number of full months from
date of original issue to Example 5. On June 1, 1982, Acme bond when you sold it is $9,990 ($9,966 cost
date of maturity Corporation issued 20-year bonds at 90% of plus $14 OID for 1996 and $10 OID for 1997).
the principal amount. On February 1, 1997,
you bought Acme bonds with a $10,000 prin-
cipal amount on the open market for $9,900. Debt Instruments Issued
Corporate Debt Instruments The amount you must include in income is After July 1, 1982, and
Issued After May 27, 1969, and figured as follows: Before 1985
Before July 2, 1982 If you hold these debt instruments as capital
1) Ratable monthly portion
If you hold these debt instruments as capital ($1,000.00 total OID ÷ 240 assets, you must include part of the OID in
assets, you must include part of the discount months) .................................... $4.17 income each year you own the instruments
in income each year you own the instruments. 2) Your cost ................................. $9,900.00 and increase your basis by the amount in-
For information about showing the correct Minus: Issue price ................... 9,000.00 cluded. For information about showing the
OID on your tax return, see the discussion $900.00 correct OID on your tax return, see How To
Minus: Accumulated OID
under How To Report OID, earlier. Your basis Report OID, earlier.
($4.17 × 176 months) .............. 733.92
in the instrument is increased by the OID you Acquisition premium ................ $166.08 You should receive a Form 1099–OID
include in income. 3) Acquisition premium divided by showing OID for the part of the year you held
number of complete and partial the bond. However, if you paid an acquisition
Form 1099–OID not received. If you held an months from date of purchase premium, you may need to refigure the OID
to maturity date ($166.08 ÷ 64 to report on your tax return. See Figuring OID
OID instrument in 1997 but did not receive a
months) .................................... 2.60 and the discussions on acquisition premium
Form 1099–OID, refer to Section I–A later in 4) Line 1 minus line 3 .................. $1.57
this publication. The OID listed is for each that follow, later.
$1,000 of redemption price. You must adjust You must include $17.27 ($1.57 × 11
this figure if your debt instrument has a dif- months) in income for 1997 because the ac- Form 1099–OID not received. If you held
ferent principal amount. For example, if you quisition premium reduces the ratable an OID instrument during the year but did not
have an instrument with a $500 principal monthly portion of OID. receive a Form 1099–OID, refer to Section
amount, use one-half the amount listed to I–A later in this publication. The OID listed is
figure your OID.
Example 6. Assume the same facts as
for each $1,000 of redemption price. You
If you held the instrument the entire year,
Example 5, except that you bought the bonds
must adjust this figure if your debt instrument
for $9,733.92. In this case, your cost equals
use the OID shown in Section I–A for calen- has a different principal amount. For example,
the original issue price plus accumulated OID.
dar year 1997. If you did not hold the instru- if you have an instrument with a $500 princi-
Therefore, you did not pay an acquisition
ment the entire year, figure your OID using pal amount, use one-half the amount listed to
premium. For 1997, include $45.87 ($4.17 ×
the following method. figure your OID.
11 months) of OID in income.
If you held the debt instrument the entire
1) Divide the OID shown for 1997 by 12. Example 7. Assume the same facts as year, use the OID shown for calendar year
Example 5, except that you bought the bonds 1997. If you did not hold the debt instrument
2) Multiply the result in (1) by the number
for $9,400. In this case, you must include the entire year, figure your OID using either
of complete and partial months (for ex-
$45.87 of OID in your 1997 income. You did of the following methods.
ample, 61/2 months) you held the debt
not pay an acquisition premium because you Method 1.
instrument in 1997. This is the OID to
bought the bonds for less than the sum of the (This computation is an approximation and
include in income unless you paid an
original issue price plus accumulated OID. may result in a slightly higher amount of OID
acquisition premium. The reduction for
You do have market discount, which must be than Method 2.)
acquisition premium is discussed later.
reported under the rules explained in chapter
1 of Publication 550. 1) Divide the total OID for 1997 by 365.
If your instrument is not listed in Section
I–A, consult the issuer for information about 2) Multiply the result in (1) by the number
the issue price, yield to maturity, and the OID Transfers during the month. If you buy or of days you held the debt instrument in
that accrued for 1997. sell a debt instrument on any day other than 1997.
the same day of the month as the date of
Acquisition premium. If you bought the in- original issue, the ratable monthly portion of Method 2.
strument for more than the original issue price OID for the month of sale is divided between
plus the accumulated OID from the date of the seller and the buyer according to the 1) Look up the daily OID amount for the first
issue, that excess (or acquisition premium) number of days each held the instrument. 1997 accrual period you held the instru-
reduces the OID includible in income. In this Your holding period for this purpose begins ment. (See Accrual period under Figur-
case, figure the amount to include in income the day you obtain the instrument and ends ing OID, next.)
as follows. the day before you dispose of it.
2) Multiply the daily OID amount by the
Example 8. On June 1, 1982, Ace Cor- number of days in 1997 you held the in-
1) Divide the total OID on the instrument strument during that accrual period.
by the number of complete months, and poration issued a bond for $9,280,
any part of a month, from the date of redeemable in 15 years at a stated redemp- 3) If you held the instrument for part of both
original issue to the maturity date. This tion price of $10,000. The total OID is $720. 1997 accrual periods, repeat (1) and (2)
is the ratable monthly portion. The ratable monthly portion is $4, which is for the second accrual period.
computed by dividing $720 by 180 months.
2) Subtract from your cost the issue price You bought the bond on September 14, 1996, 4) Add the results of (2) and (3). This is the
and the accumulated OID from the date for $9,966 ($9,280 issue price plus $686 ac- OID to include in income for 1997, un-
of issue to the date of purchase. (If the cumulated OID). You sold it on March 14, less you paid an acquisition premium.
result is zero or less, stop here. You did 1997. You figure the OID to include in your (The reduction for acquisition premium
not pay an acquisition premium.) 1996 income as follows: is discussed later.)
Page 7
 If your instrument is not listed in Section Example 9. On January 1, 1984, you For 1991, you would have included
I–A, consult the issuer for information about bought a 20-year, 13% bond for $90,000 at $291.73 of OID in income — ($.72951 × 120
the issue price, yield to maturity, and the OID original issue. The redemption price of the days) plus ($.83342 × 245 days).
that accrued for 1997. bond is $100,000. The qualified stated inter- For 1992, you would have included
est is $13,000 (13% × $100,000), which is $335.40 of OID in income — ($.83342 × 121
Figuring OID. This discussion shows how to unconditionally payable each year. The bond days) plus ($.95737 × 245 days).
has a yield to maturity of 14.5587%. The daily For 1993, you would have included
figure OID on debt instruments issued after
July 1, 1982, and before 1985, using a con- OID for the first accrual period is figured as $383.59 of OID in income — ($.95737 × 120
stant yield method (also known as the “ex- follows: days) plus ($1.09677 × 245 days).
act” method). This method corresponds to the For 1994, you would have included
($90,000.00 × 14.5587%) – $13,000 $439.44 of OID in income — ($1.09677 × 120
actual economic accrual of interest. OID is
allocated over the life of the instrument
366 (leap year) days) plus ($1.25644 × 245 days).
through adjustments to the issue price for 102.83 For 1995, you would have included
each accrual period.
= = $.28096 $502.45 of OID in income — ($1.25644 × 120
366
Figure the OID allocable to any accrual days) plus ($1.43541 × 245 days).
period as follows. You would have included in income For 1996, you would have included
$.28096 for each day you held the bond dur- $577.66 of OID in income — ($1.43541 × 121
ing 1984. If you held the bond for all of 1984, days) plus ($1.64890 × 245 days).
1) Multiply the “adjusted issue price” at the
you would have included OID of $102.83 If you sold the bond on August 30, 1997,
beginning of the accrual period by the
instrument's “yield to maturity.” ($.28096 × 366). you would figure the amount to include in your
The following table shows the adjusted 1997 income as follows:
2) Subtract from the result in (1) any “qual- issue price, daily OID, and OID per accrual First accrual period: $1.64890 × 120 days
ified stated interest” allocable to the “ac- period through 1997. (Jan 1 – Apr 30) ........................................ $197.87
crual period.” Second accrual period: $1.88896 × 121
days (May 1 – Aug 29) .............................. 228.56
OID per Total to include in 1997 income ................ $426.43
Adjusted issue price. The adjusted is- Acc. Adjusted Accrual
sue price of a debt instrument at the begin- Per. Year Issue Price Daily OID Period However, if you held the bond the entire
ning of the first accrual period is its issue 1 1984 $90,000.00 $.28096 $102.83 year of 1997, the total OID to report is
price. The adjusted issue price for any sub- 2 1985 90,102.83 .32274 117.80 $660.67 [$197.87 + $462.80 ($1.88896 × 245
sequent accrual period is the sum of the issue 3 1986 90,220.63 .36973 134.95 days)].
price and all of the OID includible in income 4 1987 90,355.58 .42356 154.60
5 1988 90,510.18 .48391 177.11
before that accrual period minus any payment 6 1989 90,687.29 .55586 202.89 Acquisition premium on debt instruments
previously made on the instrument, other than 7 1990 90,890.18 .63679 232.43 purchased before July 19, 1984. If you
a payment of qualified stated interest. 8 1991 91,122.61 .72951 266.27 bought a debt instrument for more than its
Yield to maturity (YTM). The yield to 9 1992 91,388.88 .83342 305.03 adjusted issue price (defined earlier), you
maturity is generally shown on the face of the 10 1993 91,693.91 .95737 349.44 paid an acquisition premium that reduces the
bond or in the literature you receive from your 11 1994 92,043.35 1.09677 400.32
12 1995 92,443.67 1.25644 458.60
OID to include in income over the period you
broker. If you do not have this information, hold the bond.
13 1996 92,902.27 1.43541 525.36
consult your broker or tax advisor. In general, 14 1997 93,427.63 1.64890 601.85 You reduce the daily OID by the daily ac-
the YTM is the discount rate that, when used quisition premium. Figure this by dividing the
in figuring the present value of all principal The daily OID for 1998 is figured as fol- acquisition premium by the number of days
and interest payments, produces an amount lows: in the period beginning on your purchase date
equal to the issue price. and ending on the day before the date of
($94,029.48 × 14.5587%) – $13,000
Qualified stated interest (QSI). Qualified maturity.
stated interest is stated interest that is un- 365
conditionally payable in cash or property 689.47 Example 11. Assume the same facts as
(other than debt instruments of the issuer) at = = $1.88896 Example 10, except that you bought the bond
365
least annually at a single fixed rate. for $92,000 on May 1, 1984, after its original
Accrual period. An accrual period for If you hold the bond for all of 1998 (the issue on May 1, 1983. In this case, you paid
any OID instrument issued before 1985 is fifteenth accrual period), you would include more for the bond than its $90,102.83 ad-
each one-year period beginning on the date $689.47 in income (1.88896 × 365). justed issue price ($90,000 + 102.83). The
of the issue of the obligation and each anni- OID reduced by the daily acquisition premium
versary thereafter, or the shorter period to Example 10. Assume the same facts as for the accrual period May 1, 1984, to April
maturity for the last accrual period. Your tax Example 9, except that you bought the bond 30, 1985, is figured as follows:
year will usually overlap more than one ac- at original issue on May 1, 1983. The daily
OID for the first accrual period (May 1, 1983 1) Daily OID on date of purchase (2nd ac-
crual period. crual period) .......................................... $.32274
Daily OID. The OID for any accrual period – April 30, 1984) was $.28096, as figured in
is allocated ratably to each day in the accrual Example 9. If you held the bond until the end 2) Your cost ........................... $92,000.00
of 1983, you would have included $68.84 in Minus: Issue price ............. 90,000.00
period. You must include in income the sum
$2,000.00
of the OID amounts for each day that you hold income for 1983 ($.28096 × 245 days).
Minus:
the instrument during the year. If your tax year For 1984, you would have included Accumulated OID
overlaps more than one accrual period, you $113.07 of OID in income — ($.28096 × 121 ($.28096 × 366 days) ........ 102.83
must include the proper daily OID amounts for days) plus ($.32274 × 245 days). Acquisition premium .......... $1,897.17
each of the two accrual periods. For 1985, you would have included 3) Acquisition premium divided by total
The daily OID for the initial accrual pe- $129.31 of OID in income — ($.32274 × 120 days from purchase date to maturity
riod is computed using the following formula: days) plus ($.36973 × 245 days). date: $1,897.17 ÷ 6,939 [(365 × 19
For 1986, you would have included years) + 4 days for leap years] ............. .27341
(ip × ytm) – qsi $148.14 of OID in income — ($.36973 × 120 4) Line 1 minus line 3 ............ $.04933
p days) plus ($.42356 × 245 days). The OID you would have included in in-
For 1987, you would have included come for 1984 is $12.09 ($.04933 × 245
$169.39 of OID in income — ($.42356 × 120 days).
ip = issue price days) plus ($.48391 × 245 days).
ytm = yield to maturity For 1988, you would have included Assuming you still owned the bond in
qsi = qualified stated interest $194.74 of OID in income — ($.48391 × 121 1997, you would have reduced the total OID
days) plus ($.55586 × 245 days). for each year (as determined in Example 10)
p = number of days in accrual period For 1989, you would have included by the allocable portion of the acquisition
The daily OID for subsequent accrual $222.71 of OID in income — ($.55586 × 120 premium for that year. You would have in-
periods is computed the same way except days) plus ($.63679 × 245 days). cluded the following amounts in income:
the adjusted issue price at the beginning of For 1990, you would have included $29.52 for 1985, $48.35 for 1986, $69.60 for
each period is used in the formula instead of $255.14 of OID in income — ($.63679 × 120 1987, $94.67 for 1988, $122.92 for 1989,
the issue price. days) plus ($.72951 × 245 days). $155.35 for 1990, $191.94 for 1991, $235.33
Page 8
for 1992, $283.80 for 1993, $339.65 for 1994, The total amount to include in income for 2) Multiply the daily OID amount by the
$402.66 for 1995, and $477.59 for 1996. 1997 (August 1 – December 31) is $191.92 number of days in 1997 you held the in-
If you held the bond all of 1997, reduce the ($1.25442 × 153 days). strument during that accrual period.
total OID for that year, $660.67 (as deter- If you held the bond for all of 1998, reduce
3) Repeat (1) and (2) for any remaining
mined in Example 10), by the allocable por- the OID for that year ($660.67) by $15.81
1997 accrual periods in which you held
tion of the acquisition premium for 1997, (.023924 × $660.67). The difference,
the instrument.
$99.79 ($.27341 × 365 days). The difference, $644.86, is the total OID to include in income
$560.88, is the total OID to include in income for 1997. 4) Add the results of (2) and (3). This is the
for 1997. OID to include in income for 1997 unless
Note. If you bought your corporate debt you paid an acquisition premium. (The
Example 12. Assume the same facts as instrument in 1997 or 1998 and it is listed in reduction for acquisition premium is dis-
Example 11, except that you bought the bond Section I–A , you can compute the accumu- cussed later.)
for $90,102.83. In this case, you bought the lated OID to the date of purchase by adding
bond for an amount equal to the original issue the following amounts. If your instrument is not listed in Section
price plus accumulated OID. Therefore, you I–B, consult the issuer for information about
did not pay an acquisition premium. You 1) The amount from the “Total OID to the issue price, yield to maturity, and the OID
would have included $79.07 ($.32274 × 245 1/1/97” column for your debt instrument. that accrued for 1997.
days) in income for 1984. For the remaining 2) The OID from January 1, 1997, to the
years, you would have included the amounts date of purchase, figured as follows: Tax-exempt bond. If you own a tax-exempt
figured in Example 10. bond, figure your basis in the bond by adding
a) Multiply the daily OID for the first to your cost the OID you would have included
Example 13. Assume the same facts as accrual period in 1997 by the num- in income if the bond had been taxable. You
Example 11 , except that you bought the bond ber of days from January 1 to the need to make this adjustment to determine if
for $89,500. You did not pay an acquisition date of purchase, or the end of the you have a gain or loss on a later disposition
premium because your cost was less than the accrual period if the instrument was of the bond. Use the rules that follow to de-
adjusted issue price. You must include in in- purchased in the second or third termine your OID.
come each year the amounts figured in Ex- accrual period.
ample 12. You do have market discount be- b) Multiply the daily OID for each Figuring OID. This discussion shows how to
cause your cost was less than the issue price subsequent accrual period by the figure OID on debt instruments issued after
plus the total OID that accrued before you number of days in the period to the 1984 using a constant yield method, also
acquired the bond. See Market discount, date of purchase or the end of the known as the “exact” method. (The special
earlier, under Purchase after date of original accrual period, whichever applies. rules that apply to contingent payment debt
issue at the beginning of this section of the instruments and inflation-indexed debt instru-
publication. c) Add the amounts figured in (2a) and ments are explained later.) This method cor-
(2b). responds to the actual economic accrual of
interest. OID is allocated over the life of the
Acquisition premium on debt instruments instrument through adjustments to the issue
purchased after July 18, 1984. If you pur- Debt Instruments Issued price for each accrual period.
chased an OID instrument for more than its After 1984 Figure the OID allocable to any accrual
adjusted issue price (defined earlier), you period as follows.
If you hold debt instruments issued after
paid an acquisition premium. If you bought
1984, you must report part of the discount in
the debt instrument after July 18, 1984, the 1) Multiply the “adjusted issue price” at the
gross income each year that you own the in-
method of calculating the reduction of OID beginning of the accrual period by a
struments. You must include the OID in gross
includible in income is different from the fraction. The numerator of the fraction is
income whether or not you hold the instru-
method described earlier in Example 11. Un- the instrument's “yield to maturity” and
ment as a capital asset. Your basis in the in-
der this method, you multiply the daily OID the denominator is the number of accrual
strument is increased by the OID you include
by the following fraction to figure the amount periods per year.
in income. For information about showing the
that reduces the daily OID.
correct OID on your tax return, see How To 2) Subtract from the result in (1) any “qual-
Report OID, earlier. ified stated interest” allocable to the “ac-
1) The numerator is the acquisition pre- You should receive a Form 1099–OID
mium, and crual period.”
showing OID for the part of 1997 you held the
2) The denominator is the total OID re- bond. However, if you paid an acquisition Adjusted issue price. The adjusted is-
maining for the instrument after your premium, you may need to refigure the OID sue price of a debt instrument at the begin-
purchase date. to report on your tax return. See Figuring OID ning of the first accrual period is its issue
and Acquisition premium, later. price. The adjusted issue price for any sub-
You may also need to refigure the OID for sequent accrual period is the sum of the issue
Example 14. Assume the same facts as a contingent payment or inflation-indexed price and all of the OID includible in income
Example 9, except that you bought the bond debt instrument on which the amount reported before that accrual period minus any payment
for $95,000 on August 1, 1997, after its ori- on Form 1099–OID is inaccurate. See Con- previously made on the instrument, other than
ginal issue on August 1, 1984. In this case, tingent Payment Debt Instruments or a payment of qualified stated interest.
you paid more for the bond than its Inflation-Indexed Debt instruments, later. Yield to maturity (YTM). The yield to
$93,427.63 adjusted issue price ($90,000 +
maturity is generally shown on the face of the
$102.83 + $117.80 + $134.95 + $154.60 +
Form 1099–OID not received. If you had bond or in the literature you receive from your
$177.11 + $202.89 + $232.43 + $266.27 +
OID for 1997 but did not receive a Form broker. If you do not have this information,
$305.03 + $349.44 + $400.32 + $458.60 +
1099–OID, refer to Section I–B later in this consult your broker or tax advisor. In general,
$525.36). You paid $1,572.37 ($95,000 −
publication. The OID listed is for each $1,000 the YTM is the discount rate that, when used
$93,427.63) acquisition premium. The daily
of redemption price. You must adjust this fig- in computing the present value of all principal
OID as reduced for the acquisition premium
ure if your debt instrument has a different and interest payments, produces an amount
for the accrual period August 1, 1997, to July
principal amount. For example, if you have equal to the issue price.
31, 1998, is figured as follows:
an instrument with a $500 principal amount, Qualified stated interest (QSI). Qualified
use one-half the amount listed to figure your stated interest is stated interest that is un-
1) Daily OID on date of purchase (14th
accrual period) ................................... $1.64890* OID. conditionally payable in cash or property
2) Acquisition premium ......... $1,572.37 Use the OID shown for the calendar year (other than debt instruments of the issuer) at
3) Acquisition premium di- if you held the instrument the entire year. If least annually at a single fixed rate.
vided by total OID remain- you did not hold the debt instrument the entire Accrual period. For debt instruments is-
ing after purchase date: year, figure your OID as follows. sued after 1984 and before April 4, 1994, an
$1,572.37 ÷ $6,572.37 accrual period is each 6-month period that
($10,000 − $3,427.63) ...... 0.23924
1) Look up the daily OID amount for the first ends on the day that corresponds to the
4) Line 1 times line 3 ............................. .39448
5) Line 1 minus line 4 ............................ $1.25442 1997 accrual period in which you held stated maturity date of the debt instrument
the instrument. (See Accrual period un- or the date 6 months before that date. For
(* As shown in Example 9.) der Figuring OID, later.) example, a debt instrument maturing on
Page 9
March 31 has accrual periods that end on clude in income for 1997 the OID allocable to If your cost is less than the adjusted issue
September 30 and March 31 of each calendar the first two accrual periods, $174.11 price, you may have a market discount bond.
year. Any short period is included as the first ($.96193 × 181 days) plus $184.56 ($1.00303 See Market discount, earlier, under Purchase
accrual period. × 184 days), or $358.67. Add the OID to the after date of original issue at the beginning
For debt instruments issued after April 3, $10,000 interest you report in 1997. of this section of the publication.
1994, accrual periods may be of any length
and may vary in length over the term of the Example 16. Assume the same facts as Example 17. Assume the same facts as
instrument as long as each accrual period is Example 15, except that you bought the bond Example 16 , except that you bought the bond
no longer than one year and all payments are at original issue on May 1, 1997. Also, the on November 1, 1997, for $87,000, after its
made on the first or last day of an accrual interest payment dates are October 31 and original issue on May 1, 1997. The adjusted
period. However, the OID listed for these debt April 30 of each calendar year. The accrual issue price (issue price plus accumulated
instruments in Section I–B has been figured periods are the 6-month periods ending on OID) on November 1, 1997, is $86,409.28.
using 6-month accrual periods. each of these dates. Under these assumptions, you purchased the
Daily OID. The OID for any accrual period The daily OID for the first accrual period bond at an acquisition premium of $590.72
is allocated ratably to each day in the accrual (May 1, 1997 — October 31, 1997) is figured (your cost, $87,000, less the adjusted issue
period. Figure the amount to include in in- as follows: price, $86,409.28) and you must reduce the
come by adding the daily OID amounts for daily OID for any day you hold the bond.
($86,235.17 × .12/2) – $5,000
each day that you hold the debt instrument The daily OID, as reduced for the acqui-
during the year. Since your tax year will usu- 184 days sition premium, for the accrual period No-
ally overlap more than one accrual period, $174.11 vember 1, 1997, to April 30, 1998, is figured
you must include the proper daily OID = = $.94625 as follows:
184
amounts for each accrual period that falls
1) Daily OID on date of purchase (2nd
within or overlaps your tax year. If your debt The daily portion of OID for the second
accrual period) .................................... $1.01965
instrument has 6-month accrual periods, your accrual period (November 1, 1997 — April 30, 2) Acquisition premium ............. $590.72
tax year will usually include one full 6-month 1998) is: 3) Acquisition premium divided
accrual period and parts of two other 6-month by total OID remaining after
periods. ($86,409.28 × .12/2) – $5,000 purchase date: $590.72 ÷
The daily OID is determined by dividing 181 days ($13,764.83 − $174.11) ........ .04347
the OID for the accrual period by the number 4) Line 1 times line 3 .............................. .04432
$184.56 5) Line 1 minus line 4 ............................. $.97533
of days in the period. = = $1.01965
181
Expressed as a formula, the daily OID for The total OID to include in income for
the initial accrual period is computed as 1997 is $59.50 ($.97533 × 61 days).
follows: If you hold the bond through the end of
(ip × ytm/n) – qsi 1997, you must include $236.31 of OID in in-
come, $174.11 ($.94625 × 184 days) plus Contingent Payment Debt
p
$62.20 ($1.01965 × 61 days). The OID is Instruments
added to the $5,000 interest income paid on This discussion shows how to figure OID on
ip = issue price
October 31, 1997. Your basis in the bond is a contingent payment debt instrument issued
ytm = yield to maturity increased by the OID you include in income. after August 12, 1996, for cash or publicly
n = number of accrual periods in one year On January 1, 1998, your basis in the A traded property. In general, a contingent
qsi = qualified stated interest Corporation bond is $86,471.48 ($86,235.17 payment debt instrument is a debt instrument
+ $236.31). that provides for one or more payments that
p = number of days in accrual period Short first accrual period. You may are contingent as to timing or amount. If you
The daily OID for subsequent accrual have to make adjustments if a debt instru- hold a contingent payment debt instrument,
periods is computed the same way except ment has a short first accrual period. For ex- you must report OID as it accrues each year.
that the adjusted issue price at the beginning ample, a debt instrument with 6-month ac- Because the actual payments on a con-
of each period is used in the formula instead crual periods that is issued on February 15 tingent payment debt instrument cannot be
of the issue price. and matures on October 31 has a short first known in advance, issuers and holders can-
accrual period that ends April 30. (The re- not use the constant yield method (discussed
Example 15. On January 1, 1997, you maining accrual periods begin on May 1 or earlier under Debt Instruments Issued After
bought a 15-year, 10% bond of A Corporation November 1.) For this short period, compute 1984) without making certain assumptions
at original issue for $86,235.17. According to the daily OID as described earlier, but adjust about the payments on the debt instrument.
the prospectus, the bond matures on De- the yield for the length of the short accrual To figure OID accruals on contingent payment
cember 31, 2011, at a stated redemption period. You may use any reasonable com- debt instruments, holders and issuers must
price of $100,000. The yield to maturity is pounding assumption in determining OID for use the noncontingent bond method. Un-
12%, compounded semiannually. The bond a short period. Examples of reasonable com- der this method, the issuer must construct a
provides for qualified stated interest pay- pounding methods include continuous com- hypothetical noncontingent bond that has
ments of $5,000 on June 30 and December pounding and monthly compounding (that is, terms and conditions similar to the contingent
31 of each calendar year. The accrual periods simple interest within a month). Consult your payment debt instrument. The issuer con-
are the 6-month periods ending on each of tax advisor for more information about making structs the payment schedule of the hy-
these dates. The daily OID for the first accrual this computation. pothetical noncontigent bond by projecting a
period is figured as follows: The OID for the final accrual period is fixed amount for each contingent payment.
the excess of the amount payable at maturity Holders and issuers accrue OID on this hy-
($86,235.17 × .12/2) – $5,000
over the adjusted issue price (issue price plus pothetical noncontingent bond using the con-
181 days accumulated OID) at the beginning of the final stant yield method that applies to fixed pay-
$174.11 accrual period. ment debt instruments. When the amount of
= = $.96193 a contingent payment differs from the
181
Acquisition premium. If you bought a debt projected fixed amount, the holders and
The adjusted issue price at the beginning instrument for more than its adjusted issue issuers make adjustments to their OID ac-
of the second accrual period is the issue price price (defined earlier), you paid an acquisition cruals. If the actual contingent payment is
plus the OID previously includible in income premium. The acquisition premium reduces larger than expected, both the issuer and the
($86,235.17 + $174.11), or $86,409.28. The the OID you include in income over the re- holder increase their OID accruals. If the ac-
daily OID for the second accrual period is: maining life of the bond. Multiply the daily OID tual contingent payment is smaller than ex-
by the following fraction to figure the amount pected, holders and issuers generally de-
($86,409.28 × .12/2) – $5,000 that reduces the daily OID. crease their OID accruals.
184 days
1) The numerator is the acquisition pre-
$184.56 Form 1099–OID. The amount shown in box
= = $1.00303 mium, and
184 1 of Form 1099–OID you receive for a con-
2) The denominator is the total OID re- tingent payment debt instrument may not be
Since the first and second accrual periods maining for the instrument after your the correct amount to include in income. For
coincide exactly with your tax year, you in- purchase date. example, the amount may not be correct if the
Page 10
amount of a contingent payment was different noncontigent payment received and the Figuring OID. The OID on an inflation-
from the projected amount. If the amount in projected amount of any contingent payment indexed debt instrument is figured using one
box 1 is not correct, you must figure the OID scheduled to be received. of two methods.
to report on your return under the following
rules. For information on showing an OID 1) The coupon bond method, described
Treatment of sale or exchange. If you sell
adjustment on your tax return, see How To in the following discussion, applies if the
a contingent payment debt instrument at a
Report OID, earlier. instrument is issued at par and all stated
gain, your gain is ordinary income, even if you
interest payable on the instrument is
hold the instrument as a capital asset. If you
qualified stated interest. This method
Figuring OID. To figure OID on a contingent sell a contingent payment debt instrument at
applies, for example, to any Treasury
payment debt instrument, you need to know a loss, your loss is an ordinary loss to the
Inflation-Indexed Security.
the “comparable yield” and “projected pay- extent of your prior OID accruals on the in-
ment schedule” of the debt instrument. The strument. If your loss exceeds your prior OID 2) The discount bond method applies to
issuer must make these available to you. accruals and the instrument is a capital asset, any inflation-indexed debt instrument
Comparable yield. The comparable yield treat the excess loss as a capital loss. that does not qualify for the coupon bond
is the yield on the hypothetical noncontingent method. This method is described in
bond that the issuer determines and con- section 1.1275–7T(e) of the Income Tax
structs at the time of issuance. Inflation-Indexed Debt Regulations.
Projected payment schedule. The Instruments
projected payment schedule is the payment This discussion shows how you figure OID Under the coupon bond method, figure the
schedule of the hypothetical noncontingent on certain inflation-indexed debt instruments amount of OID you must report for the tax
bond. The schedule includes all fixed pay- issued after January 5, 1997. An inflation- year as follows.
ments due under the contingent payment debt indexed debt instrument is generally a debt Debt instrument held at the end of the
instrument and a projected fixed amount for instrument on which the payments are ad- tax year. If you held the debt instrument at
each contingent payment. The projected justed for inflation and deflation (such as the end of the tax year, figure the amount of
payment schedule is determined by the Treasury Inflation-Indexed Securities). OID by subtracting:
issuer. In general, if you hold an inflation-indexed
Steps for figuring OID. Figure the OID 1) The inflation-adjusted principal amount
debt instrument, you must report as OID any
on a contingent payment debt instrument in for the first day on which you held the
increase in the inflation-adjusted principal
two steps. instrument during the tax year from
amount of the instrument that occurs while
you held the instrument during the tax year. 2) The total of:
1) Figure the OID on the hypothetical non- You must include the OID in gross income
contingent bond using the constant yield a) The inflation-adjusted principal
whether or not you hold the instrument as a
method (discussed earlier under Debt amount for the day after the last day
capital asset. Your basis in the instrument is
Instruments Issued After 1984) that ap- of the tax year, and
increased by the OID you include in income.
plies to fixed payment debt instruments. b) Any principal payments you re-
Use the comparable yield as the yield to Inflation-adjusted principal amount. For ceived during the year.
maturity. Use the projected payment any date, the inflation-adjusted principal
schedule to determine the hypothetical amount of an inflation-indexed debt instru- Debt instrument sold or retired during
bond's adjusted issue price at the be- ment is: the tax year. If you sold the debt instrument
ginning of the accrual period. Do not during the tax year, or if it was retired, figure
treat any amount payable as qualified 1) The instrument's outstanding principal the amount of OID by subtracting:
stated interest. amount (determined as if there were no 1) The inflation-adjusted principal amount
2) Adjust the OID in (1) to account for ac- inflation or deflation over the term of the for the first day on which you held the
tual contingent payments. If the amount instrument), multiplied by instrument during the tax year from:
of a contingent payment is greater than 2) The index ratio for that date.
the projected fixed amount, you have a 2) The total of:
positive adjustment. If the amount of the Index ratio. This is a fraction, the nu- a) The inflation-adjusted principal
contingent payment is less than the merator of which is the value of the reference amount for the last day on which
projected fixed amount, you have a index for the date and the denominator of you held the instrument during the
negative adjustment. which is the value of the reference index for tax year, and
the instrument's issue date. b) Any principal payments you re-
Net positive adjustment. A net positive A qualified reference index measures in-
adjustment exists when the total of any posi- ceived during the year.
flation and deflation over the term of a debt
tive adjustments described in (2) above ex- instrument. Its value is reset each month to Example 18. On February 6, 1997, you
ceeds the total of any negative adjustments. a current value of a single qualified inflation bought a 10–year, 3.375% inflation-indexed
Treat a net positive adjustment as additional index (for example, the nonseasonally ad- debt instrument for $9,831. The stated prin-
OID for the tax year. justed U.S. City Average All Items Consumer cipal amount is $10,000 and the inflation-
Net negative adjustment. A net negative Price Index for All Urban Consumers (CPI-U), adjusted principal amount for February 6,
adjustment exists when the total of any neg- published by the Bureau of Labor Statistics 1997, is $10,010.40. You held the debt in-
ative adjustments described in (2) above ex- of the Department of Labor). The value of the strument until September 1, 1997, when the
ceeds the total of any positive adjustments. index for any date between reset dates is inflation-adjusted principal amount was
Use a net negative adjustment to offset OID determined through straight-line interpolation. $10,116.50. Your OID for the 1997 tax year
on the debt instrument for the tax year. If the
is $106.10 ($10,116.50 — $10,010.40). Your
amount of the net negative adjustment ex- The daily index ratios for Treasury
basis in the debt instrument on September
ceeds the OID on the debt instrument for the Inflation-Indexed Securities are avail-
1, 1997, was $9,937.10 ($9,831 cost plus
tax year, you can claim the excess as an or- able on the World Wide Web at:
$106.10 OID for 1997).
dinary loss. However, the amount you can www.publicdebt.ustreas.gov
claim as an ordinary loss is limited to the Stated interest. Under the coupon bond
amount of OID on the debt instrument you Form 1099–OID. The amount shown in box method, you report any stated interest on the
included in income in prior tax years. You 1 of Form 1099–OID you receive for an debt instrument under your regular method
must carry forward any excess net negative inflation-indexed debt instrument may not be of accounting. For example, if you use the
adjustment and treat it as a negative adjust- the correct amount to include in income. For cash method, you generally include in income
ment in the next tax year. example, the amount may not be correct if for the tax year any interest payments re-
you bought the debt instrument (other than ceived on the instrument during the year.
Basis adjustments. In general, increase at original issue) or sold it during the year. If
your basis in a contingent payment debt in- the amount shown in box 1 is not correct, you Deflation adjustments. If your calculation
strument by the amount of OID included in must figure the OID to report on your return to figure OID on an inflation-indexed debt in-
income. Your basis, however, is not affected under the following rules. For information strument produces a negative number, you
by any negative or positive adjustments. De- about showing an OID adjustment on your tax do not have any OID. Instead, you have a
crease your basis by the amount of any return, see How to Report OID, earlier. deflation adjustment. A deflation adjustment
Page 11
generally is used to offset interest income Treat any item you keep as an OID bond 1) The coupon rate on the bond from which
from the debt instrument for the tax year. This originally issued and purchased by you on the the coupons were separated, or
offset is shown as an adjustment on your sale date of the other items. If you keep the
Schedule B, in the same manner as that used bond, treat the excess of the redemption price 2) The YTM based on the purchase price
to show an OID adjustment. See How To of the bond over the basis of the bond as the of the stripped coupon or bond.
Report OID, earlier. OID. If you keep the coupons, treat the ex-
You decrease your basis in the debt in- cess of the amount payable on the coupons You can choose to use the original YTM in-
strument by the amount of the deflation ad- over the basis of the coupons as the OID. stead of the coupon rate of the bond in (1)
justment used to offset interest income. above.
Purchaser of stripped bond or coupon. If Subtract this issue price from the stated
Example 19. Assume the same facts as you purchase a stripped bond or coupon, redemption price of the bond at maturity (or,
in Example 18, except that you bought the treat it as if it were originally issued on the in the case of a coupon, the amount payable
instrument on July 1, 1997, when the date of purchase. If you purchase the stripped on the due date of the coupon). The result is
inflation-adjusted principal amount was bond, treat as OID any excess of the stated the portion of the OID treated as OID on a
$10,111.40, and sold the instrument on Au- redemption price at maturity over your pur- stripped tax-exempt bond or coupon.
gust 1, 1997, when the inflation-adjusted chase price. If you purchase the stripped Step 3 — Determine taxable portion.
principal amount was $10,105.10. Because coupon, treat as OID any excess of the The taxable portion of OID is the excess of
the OID calculation for 1997 ($10,105.10 mi- amount payable on the due date of the cou- the OID determined in Step 1 over the non-
nus $10,111.40) produces a negative number pon over your purchase price. taxable portion determined in Step 2 .
(negative $6.30), you have a deflation ad- Exception. None of the OID on your
justment. You use this deflation adjustment stripped tax-exempt bond or coupon is taxa-
to offset the stated interest reported to you
Form 1099–OID ble if you bought it from a person who held it
on the debt instrument. The amount shown in box 1 of the Form for sale on June 10, 1987, in the ordinary
Your basis in the debt instrument on Au- 1099–OID you receive for a stripped bond or course of that person's trade or business.
gust 1, 1997, is $9,824.70 ($9,831 cost minus coupon may not be the proper amount to in- Basis adjustment. Increase the basis in
$6.30 deflation adjustment for 1997). clude in income. If not, you must figure the your stripped tax-exempt bond or coupon by
OID to report on your return under the rules the taxable and nontaxable accrued OID. If
that follow. For information about showing an you own a tax-exempt bond from which one
OID adjustment on your tax return, see How or more coupons have been stripped, in-
Figuring OID on Stripped To Report OID, earlier. crease your basis in it by the sum of the in-
Bonds and Coupons terest accrued but not paid before you dis-
If you strip one or more coupons from a bond Tax-Exempt Bonds and Coupons pose of it (and not previously reflected in
and then sell or otherwise dispose of the bond The OID on a stripped tax-exempt bond, or basis) and any accrued market discount to
or the stripped coupons, they are treated as on a stripped coupon from such a bond, is the extent not previously included in your in-
separate debt instruments issued with OID. generally not taxable. However, if you ac- come.
The holder of a stripped bond has the right to quired the stripped bond or coupon after Oc-
receive the principal (redemption price) pay- Example 20. Assume that a tax-exempt
tober 22, 1986, you must accrue OID on it to
ment. The holder of a stripped coupon has the bond with a face amount of $100 due January
determine its basis when you dispose of it.
right to receive the interest on the bond. The 1, 1999, and a coupon rate of 10% (com-
How you figure accrued OID and whether any
rule requiring the holder of a debt instrument pounded semiannually) was issued for $100
OID is taxable depend on the date you bought
issued with OID to include the OID in gross on January 1, 1996. On January 1, 1997, the
(or are treated as having bought) the stripped
income as it accrues applies to stripped bond was stripped and you bought the right
bond or coupon.
bonds and coupons acquired after July 1, to receive the principal amount for $79.21.
1982. See Bonds and Coupons Purchased The stripped bond is treated as if it were ori-
Acquired before June 11, 1987. None of the
After July 1, 1982, and Before 1985 or Bonds ginally issued on January 1, 1997, with OID
OID on bonds or coupons acquired before
and Coupons Purchased After 1984, later, for of $20.79 ($100.00 − $79.21). This reflects a
this date is taxable. The accrued OID is
information about figuring the OID to report. YTM at the time of the strip of 12% (com-
added to the basis of the bond or coupon. The
Stripped bonds and coupons include zero pounded semiannually). The tax-exempt por-
accrued OID is the amount that produces a
coupon instruments available through the tion of OID on the stripped bond is limited to
yield to maturity (YTM), based on your pur-
Department of the Treasury's STRIPS pro- $17.73. This is the difference between the
chase date and purchase price, equal to the
gram and government-sponsored enterprises redemption price ($100) and the issue price
lower of:
such as the Resolution Funding Corporation that would produce a YTM of 10% ($82.27).
and the Financing Corporation. They also in- 1) The coupon rate on the bond before the This portion of the OID is treated as OID on
clude instruments backed by U.S. Treasury separation of coupons, or a tax-exempt obligation.
securities that represent ownership interests The OID on the stripped bond that is more
in those securities. Examples include obli- 2) The YTM of the stripped bond or coupon. than the tax-exempt portion is $3.06. This is
gations backed by U.S. Treasury bonds that the excess of the total OID ($20.79) over the
If you can establish the YTM of the bond (with
are offered primarily by brokerage firms tax-exempt portion ($17.73). This portion of
all coupons attached) at the time of its original
(variously called CATS, TIGRs, etc.). the OID ($3.06) is treated as OID on an obli-
issue, you may use that YTM instead of the
gation that is not tax exempt.
coupon rate in (1) above.
The total OID allocable to the accrual pe-
Seller of stripped bond or coupon. If you Increase your basis in the stripped tax-
riod ending June 30, 1997, is $4.75 (6% of
strip coupons from a bond and sell the bond exempt bond or coupon by the interest that
$79.21). Of this, $4.11 (5% of $82.27) is
or coupons, include in income the interest that accrued but was not paid, and was not pre-
treated as OID on a tax-exempt obligation
accrued while you held the bond before the viously reflected in your basis, before the date
and $0.64 ($4.75 − $4.11) is treated as OID
date of sale, to the extent the interest was not you sold the bond or coupon.
on an obligation that is not tax exempt. Your
previously included in your income. For an basis in the bond is increased to $83.96
obligation acquired after October 22, 1986, Acquired after June 10, 1987. Part of the ($79.21 issue price plus accrued OID of
you must also include the market discount OID on bonds or coupons acquired after this $4.75).
that accrued before the date of sale of the date may be taxable. Figure the taxable part
stripped bond (or coupon) to the extent the in three steps.
discount was not previously included in your Step 1 — Figure OID as if all taxable. Bonds and Coupons Purchased
income. First figure the OID following the rules in this After July 1, 1982, and Before
Add the interest and market discount that section as if all the OID were taxable. (See
you include in income to the basis of the bond Bonds and Coupons Purchased After 1984, 1985
and coupons. This adjusted basis is then al- later.) Use the yield to maturity (YTM) based If you purchased a stripped bond or coupon
located between the items you keep and the on the date you obtained the stripped bond after July 1, 1982, and before 1985, and you
items you sell, based on the fair market value or coupon. held that debt instrument as a capital asset
of the items. The difference between the sale Step 2 — Determine nontaxable por- during any part of 1997, you must compute
price of the bond (or coupon) and the allo- tion. Find the issue price that would produce the OID to be included in income using a
cated basis of the bond (or coupon) is the a YTM as of the purchase date equal to the constant yield method that corresponds to
gain or loss from the sale. lower of: the actual economic accrual of interest. Under
Page 12
 1/14

this method, OID is allocated over the time

you hold the debt instrument by adjusting the
( $100,000
$20,000 ) – 1 bond (or payment date of a stripped coupon)
or the date 6 months before that date. For
acquisition price for each accrual period. The = (1.121828 -1) = 0.12183 = 12.183% example, a stripped bond that has a maturity
OID for the accrual period is figured by date (or a stripped coupon that has a payment
multiplying the adjusted acquisition price at Use 12.183% YTM to figure the OID for date) of March 31 has accrual periods that
the beginning of the period by the yield to each accrual period or partial accrual period end on September 30 and March 31 of each
maturity. for which you must report OID. calendar year. Any short period is included
as the first accrual period.
For a stripped bond or coupon acquired
Adjusted acquisition price. The adjusted Daily OID. The OID for any accrual period after April 3, 1994, accrual periods may be
acquisition price of a stripped bond or coupon is allocated ratably to each day in the accrual of any length and may vary in length over the
at the beginning of the first accrual period is period. You figure the amount to include in term of the instrument as long as each ac-
its purchase (or acquisition) price. The ad- income by adding the daily OID amounts for crual period is no longer than one year and
justed acquisition price for any subsequent each day that you hold the debt instrument all payments are made on the first or last day
accrual period is the sum of the acquisition during the year. If your tax year overlaps more of an accrual period.
price and all of the OID includible in income than one accrual period (which will be the
before that accrual period. case unless the accrual period coincides with
your tax year), you must include the proper Yield to maturity (YTM). In general, the yield
daily OID amounts for each of the two accrual to maturity of a stripped bond or coupon is the
Accrual period. An accrual period for any periods. discount rate that, when used in computing
stripped bond or coupon acquired before The daily OID for the initial accrual pe- the present value of all principal and interest
1985 is each one-year period beginning on riod is computed by applying the following payments, produces an amount equal to the
the date of the purchase of the obligation and formula: acquisition price.
each anniversary thereafter, or the shorter Figuring YTM. How you figure the YTM
(ap × ytm)
period to maturity for the last accrual period. for a stripped bond or coupon purchased after
p 1984 depends on whether you have equal
accrual periods or a short initial accrual pe-
Yield to maturity (YTM). In general, the yield riod.
to maturity of a stripped bond or coupon is the ap = acquisition price 1) Equal accrual periods. If the period
discount rate that, when used in computing ytm = yield to maturity from the date you purchased a stripped bond
the present value of all principal and interest p = number of days in accrual period or coupon to the maturity date can be divided
payments, produces an amount equal to the evenly into full accrual periods without in-
acquisition price. The daily OID for subsequent accrual cluding a shorter period, then you can figure
Figuring YTM. If you purchased a periods is computed in the same way except the YTM by using the following formula:
stripped bond or coupon after July 1, 1982, that the adjusted acquisition price at the be-
but before 1985, and the period from your ginning of each period is used in the formula 1/m
instead of the acquisition price.
purchase date to the day the instrument ma-
tures can be divided exactly into full one-year
periods without including a shorter period,
The rules for figuring OID on these in-
struments are similar to those illustrated in
n ×
(( srp
ap ) – 1 )
then the YTM can be computed by applying Example 9 and Example 10, earlier, under
the following formula: Debt Instruments Issued After July 1, 1982, n = number of accrual periods in one year
and Before 1985.
srp = stated redemption price at maturity
1
ap = acquisition price
m
Bonds and Coupons Purchased m = number of full accrual periods from pur-
srp
( )ap – 1 After 1984
If you purchased a stripped bond or coupon
chase to maturity
If the instrument is a stripped coupon, the
stated redemption price is the amount paya-
after 1984, and you held that debt instrument ble on the due date of the coupon.
srp = stated redemption price at maturity during any part of 1997, you must compute
ap = acquisition price the OID to be included in income using a
constant yield method that corresponds to Example 22. On May 15, 1986, you
m = number of full accrual periods from pur- bought a coupon stripped from a U.S. Treas-
chase to maturity the actual economic accrual of interest. Under
this method, OID is allocated over the time ury bond through the Department of the
If the instrument is a stripped coupon, the you hold the debt instrument by adjusting the Treasury's STRIPS program for $38,000. An
stated redemption price is the amount paya- acquisition price for each accrual period. amount of $100,000 is payable on the cou-
ble on the due date of the coupon. See Ex- The OID for the accrual period is figured pon's due date, November 14, 1998. There
ample 21. by multiplying the adjusted acquisition price are exactly twenty-five 6-month periods be-
If the period between your purchase date at the beginning of the period by a fraction. tween the purchase date, May 15, 1986, and
and the maturity date (or due date) of the in- The numerator of the fraction is the instru- the coupon's due date, November 14, 1998.
strument does not divide into an exact num- ment's “yield to maturity” and the denominator The YTM on this stripped coupon is figured
ber of full one-year periods, so that a period is the number of accrual periods per year. as follows.
shorter than one year must be included, con- 1/25

sult your broker or your tax advisor for infor-

mation about figuring the YTM. Adjusted acquisition price. The adjusted
2 ×
(( $100,000
$38,000 ) ) – 1

acquisition price of a stripped bond or coupon = 2 × (1.039462 -1) = 0.07892 = 7.892%

Example 21. On November 15, 1984, you at the beginning of the first accrual period is
bought a coupon stripped from a U.S. Treas- its purchase (or acquisition) price. The ad- Use 7.892% YTM to figure the OID for
ury bond through the Department of the justed acquisition price for any subsequent each accrual period or partial accrual period
Treasury's STRIPS program for $20,000. An accrual period is the sum of the acquisition for which you must report OID.
amount of $100,000 is payable on the cou- price and all of the OID includible in income
pon's due date, November 14, 1998. There before that accrual period. 2) Short initial accrual period. If the
are exactly 14 one-year periods between the period from the date you purchased a
purchase date, November 15, 1984, and the stripped bond or coupon to the date of its
coupon's due date, November 14, 1998. Your Accrual period. For a stripped bond or maturity cannot be divided evenly into full
YTM on this stripped coupon is figured as coupon acquired after 1984 and before April accrual periods, so that a shorter period must
follows: 4, 1994, an accrual period is each 6-month be included, you can figure the YTM by using
period that ends on the day that corresponds the following formula (the exact method):
to the stated maturity date of the stripped

Page 13
 1 ap = acquisition price
( sr + m ) ytm = yield to maturity
How To Get More
n × (( )srp
ap – 1 ) n
p
= number of accrual periods in one year
= number of days in accrual period
Information
r = number of days from purchase to end of
short accrual period
n = number of accrual periods in one year
s = number of days in accrual period ending on
srp = stated redemption price at maturity last day of short accrual period
ap = acquisition price
r = number of days from purchase to end of You can get help from the IRS in several
short accrual period
Example 24. Assume the same facts as ways.
Example 23. The daily OID amounts are fig-
s = number of days in accrual period ending on ured as follows:
last day of short accrual period
For the short initial accrual period (using Free publications and forms. To order free
m = number of full accrual periods from pur- Formula 2), the daily OID equals:
chase to maturity publications and forms, call 1–800–
74
TAX–FORM (1–800–829–3676). You can
181
also write to the IRS Forms Distribution Cen-
$60,000 × (1 + .084051/2) – $60,000 ter nearest you. Check your income tax
Example 23. On June 2, 1997, you
bought a coupon stripped from a U.S. Treas- 74 packages for the address. Your local library
ury bond through the Department of the or post office also may have the items you
Treasury's STRIPS program for $60,000. An $1,018.374 need.
= = $13.76181
amount of $100,000 is payable on the cou- 74 For a list of free tax publications, order
pon's due date, August 14, 2003. You decide For the second accrual period (using For- Publication 910, Guide to Free Tax Services.
to figure OID using 6-month accrual periods. mula 1), the daily OID equals: It also contains an index of tax topics and
There are twelve full 6-month accrual periods related publications and describes other free
and a 74-day short initial accrual period from $61,018.37 × (.084051/2) tax information services available from IRS,
the purchase date to the coupon's due date. including tax education and assistance pro-
184
The YTM on this stripped coupon is figured grams.
as follows. If you have access to a personal computer
$2,564.3275
= = $13.93656 and modem, you also can get many forms
1 184 and publications electronically. See Quick
( (74/181) + 12 ) The adjusted acquisition price of and Easy Access to Tax Help and Forms in
2 × ($1000,000 / $60,000) -1) your income tax package for details. If space
= 2 × (1.0420253 -1) = .084051 = 8.4051% $61,018.37 in this accrual period is the ori-
ginal $60,000 acquisition price plus $1,018.37 permitted, this information is at the end of this
Use 8.4051% YTM to figure the OID for OID for the short initial accrual period (figured publication.
each accrual period or partial accrual period in step (1) of the following computation).
for which you must report OID. The OID to be reported on your 1997 tax
return is figured as follows: Tax questions. You can call the IRS with
your tax questions. Check your income tax
Daily OID. The OID for any accrual period package or telephone book for the local
is allocated ratably to each day in the accrual Daily OID × Days Held During
number, or you can call 1–800–829–1040.
period. You must include in income the sum Tax Year = Reportable OID
of the daily OID amounts for each day you 1) First accrual period:
TTY/TDD equipment. If you have access to
hold the debt instrument during the year. $13.76181 × 74 days
Since your tax year will usually overlap more (June 2 – August 14) .................. = $1,018.37 TTY/TDD equipment, you can call 1–800–
than one accrual period, you must include the 829–4059 to ask tax questions or to order
2) Second accrual period: forms and publications. See your income tax
proper daily OID amounts for each accrual $13.93656 × 139 days
period that falls within or overlaps your tax (August 15 – December 31) ........ = 1,937.18 package for the hours of operation.
year. 3) Total OID to report on 1997 tax
For the initial accrual period of a return: .......................................... $2,955.55
stripped bond or coupon acquired after 1984, Evaluating the quality of our telephone
figure the daily OID using Formula 1, next, if services. To ensure that IRS representatives
there are equal accrual periods. Use Formula Note. The rules for figuring OID on these give accurate, courteous, and professional
2 if there is a short initial accrual period. instruments are similar to those illustrated in answers, we evaluate the quality of our “800
For subsequent accrual periods, figure Example 15 and Example 16, earlier, under number” telephone services in several ways.
the daily OID using Formula 1 (whether or not Debt Instruments Issued After 1984.
there was a short initial accrual period), ex- • A second IRS representative sometimes
cept use the adjusted acquisition price in the Final accrual period. The OID for the monitors live telephone calls. That person
formula instead of the acquisition price. final accrual period for a stripped bond or only evaluates the IRS assistor and does
Formula 1 — coupon is the excess of the amount payable not keep a record of any taxpayer's name
at maturity of the stripped bond (or interest or tax identification number.
ap × ytm / n
payable on the stripped coupon) over the
p adjusted issue price at the beginning of the • We sometimes record telephone calls to
final accrual period. The daily OID for the final evaluate IRS assistors objectively. We
Formula 2 — hold these recordings no longer than one
accrual period is computed by dividing the
r OID for the period by the number of days in week and use them only to measure the
s the period. quality of assistance.
ap × (1 + ytm / n) – ap
• We value our customers' opinions.
r Throughout this year, we will be survey-
ing our customers for their opinions on
our service.

Page 14
Table 1. Explanation of Section I Column Headings

1 2 3 4 5 6 7 8

Daily OID per $1,000

of Maturity Value
Issue Price Annual Total for Each Accrual Period OID Per
(Percent of Stated OID $1,000 of Maturity Value
Name of CUSIP Issue Maturity Principal Interest to 1997 1st 1997 2nd & 1998 2nd for Calendar Year
Issuer Number Date Date Amount Rate 1/1/97 Period 1998 1st Period 1997 1998
XYZ Corp. 123456AA 08/01/83 08/01/03 90.0 13.0 36.8 .016489 .018890 .021640 6.39 7.32

1. CUSIP Number—The CUSIP number identifies the debt instrument. shown for 1997 for XYZ bond is 8/1/96-7/31/97. The part of this
The first six digits of the CUSIP number represent the issuer and the accrual period that falls in 1997 is from 1/1/97-7/31/97. For each
last two digits identify the particular issue. The ninth, or check digit, is $1,000 principal amount of the bond, the OID is .016489 each day
omitted for most debt instruments issued before 1985. you held the bond during this accrual period. Similarly, the part of
2. Issue Date—This is the date of original issue, which is generally the the second accrual period in 1997 is from 8/1/97-12/31/97. The OID
date on which the instrument was first sold to the public at the issue is .018890 for each day you held the bond during this accrual period.
price. The OID for each day you held a debt instrument in 1998 is
determined in the same manner, using the daily OID applicable to the
3. Maturity Date—This is the date the debt instrument matures and is part of each accrual period falling in 1998. If you bought the debt
redeemable at its full principal amount. For example, if the bond of instrument after original issue and paid an acquisition premium, see
XYZ Corp. above has a principal amount of $1,000, the holder will be Debt Instruments Issued After July 1, 1982, and Before 1985, earlier,
paid $1,000 when he or she redeems it on August 1, 2003 (maturity for more information.
date).
NOTE. For corporate debt instruments issued after 1984 (listed in
4. Issue Price (Percent of Principal Amount)—In general, the issue Section I-B), the columns for the daily OID amounts are increased to
price is the initial offering price at which a substantial amount of the include the number of 6-month accrual periods that apply to these
debt instruments are sold to the public. In the above example, XYZ instruments during 1997 and 1998. The 1997 OID is determined by
bonds were first offered to the public at $900. Since they have a using the daily OID for the 3 periods for the year. Although each
principal amount of $1,000, the issue price expressed as a percent of accrual period is 6 months long, a 6-month period may cross over into
principal amount is 90. the next calendar year.
5. Annual Stated Interest Rate—This is the rate of annual interest 8. OID for 1997 and 1998 (Per $1,000 of Maturity Value)—The
payments. In the above example, XYZ bond has a stated interest rate amount appearing in the 1997 column is the total OID if you held the
of 13% and pays $130 a year for each $1,000 principal amount of the instrument the entire year or the part it was outstanding. For debt
bond. instruments entirely called or maturing in 1997, the amount is
6. Total OID to 1/1/97—This shows the total OID accumulated on the computed to the date of call or maturity. In the above example, if you
debt instrument from the date of original issue to 1/1/97. (This held XYZ bond for all of 1997, the OID is $6.39 for each $1,000
information is not available for all instruments listed.) principal amount of the bond. If you did not hold the bond for the
7. Daily OID in 1997 and 1998—For corporate debt instruments issued entire year, use the daily OID for each accrual period in 1997. (See
after July 1, 1982, and before 1985, this is the OID for each day you Figuring OID, earlier, for more detailed information.) Similarly, the
held the debt instrument during the accrual periods falling in 1997 amount appearing in 1998 column is the total OID if you held the
and 1998. (The daily OID for the second accrual period in 1997 and instrument for the entire year or the part it was outstanding. If you
the first accrual period in 1998 are identical.) An accrual period is a bought the instrument after original issue and paid an acquisition
one-year period beginning on the same month and day as the date of premium, see Debt Instruments Issued After July 1, 1982, and Before
issue of the instrument. In the above example, the first accrual period 1985, earlier, for more information.

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Page 15