skip navigation

Search Help
Navigation Help

Tax Map Index
ABCDEFGHI
JKLMNOPQR
STUVWXYZ#

International
Tax Topic Index

Affordable Care Act
Tax Topic Index

FAQs
Forms
Publications
Tax Topics

Comments
About Tax Map

IRS.gov Website
Publication 1212
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206320

Information for
Owners of OID
Debt Instruments(p5)

rule
This section is for persons who prepare their own tax returns. It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. However, the information provided does not cover every situation. More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206321

Including OID in income.(p5)

rule
Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206322
Exceptions.(p5)
The rules for including OID in income as it accrues generally do not apply to the following debt instruments.
See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Publication 550 also discusses rules for holders of REMIC interests and CDOs.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206323

De minimis rule.(p5)

rule
You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Debt instruments with de minimis OID are not listed in this publication. There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Also, the de minimis rules generally do not apply to tax-exempt obligations.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206324

Example 2.(p5)

You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206325

Example 3.(p5)

Assume the same facts as Example 2, except the debt instrument was issued at $950. You must report part of the $50 OID each year because it is more than $25.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206326

Choice to report all interest as OID.(p6)

rule
Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. See Constant yield method under Debt Instruments Issued After 1984, later, for more information.
For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. For more information, see Regulations section 1.1272-3.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206327

Purchase after date of original issue.(p6)

rule
A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. If so, the OID reported to you on Form 1099-OID may have to be adjusted. For more information, see Showing an OID adjustment under How To Report OID, later. The following rules generally do not apply to contingent payment debt instruments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206328
Adjustment for premium.(p6)
If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Your adjustment is the total OID shown on your Form 1099-OID.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206329
Adjustment for acquisition premium.(p6)
If your debt instrument has acquisition premium, reduce the OID you report. Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206330
Adjustment for market discount.(p6)
If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Your adjustment is the accrued market discount for the year.
See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount.
For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1.1275-7.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206331

Sale, exchange, or redemption.(p6)

rule
Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040).
Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Your basis, generally, is your cost increased by the OID you have included in income each year you held it. In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable.
See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206332

Example 4.(p6)

Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235.00 on November 1 of Year 1. The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. The debt instrument provides for semiannual payments of interest at 10%. Assume the debt instrument is a capital asset in Larry's hands. The debt instrument has $13,765.00 of OID ($100,000 stated redemption price at maturity minus $86,235.00 issue price).
Larry sold the debt instrument for $90,000 on November 1 of Year 4. Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556.00 of OID in income and has increased his basis by that amount to $90,791.00. Larry has realized a loss of $791.00. All of Larry's loss is capital loss.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206333

Form 1099-OID(p6)

rule
The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Form 1099-OID shows all OID income in box 1 except OID on a U.S. Treasury obligation, which is shown in box 8. It also shows, in box 2, any qualified stated interest you must include in income. (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3.) A copy of Form 1099-OID will be sent to the IRS. Do not attach your copy to your tax return. Keep it for your records.
EIC
If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206335

Form 1099-OID not received.(p6)

rule
If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206336

Refiguring OID.(p6)

rule
You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies.See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206337

Refiguring interest.(p6)

rule
If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206338

Nominee.(p6)

rule
If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a "nominee." You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Show the owner of the debt instrument as the "recipient" and you as the "payer."
Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. You must also give a copy of the Form 1099-OID to the actual owner. However, you are not required to file a nominee return to show amounts belonging to your spouse. See the Form 1099 instructions for more information.
When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206339

How To Report OID(p6)

rule
Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206340

Form 1040 or Form 1040A required.(p6)

rule
You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206341

Form 1040 required.(p6)

rule
You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Also, you must use Form 1040 if you were charged an early withdrawal penalty.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206342

Where to report.(p6)

rule
List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Also include any other OID and interest income for which you did not receive a Form 1099.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206343

Showing an OID adjustment.(p7)

rule
If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next.
If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1.
  1. If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows.
    1. Under your last entry on line 1, subtotal all interest and OID income listed on line 1.
    2. Below the subtotal, write "Nominee Distribution" or "OID Adjustment" and show the OID you are not required to report.
    3. Subtract that OID from the subtotal and enter the result on line 2.
  2. If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows.
    1. Under your last entry on line 1, subtotal all interest and OID income listed on line 1.
    2. Below the subtotal, write "OID Adjustment" and show the additional OID.
    3. Add that OID to the subtotal and enter the result on line 2.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206344

Figuring OID on
Long-Term Debt Instruments(p7)

rule
How you figure the OID on a long-term debt instrument depends on the date it was issued. It also may depend on the type of the debt instrument. There are different rules for each of the following debt instruments.
  1. Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982.
  2. Corporate debt instruments issued after May 27, 1969, and before July 2, 1982.
  3. Debt instruments issued after July 1, 1982, and before 1985.
  4. Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)).
  5. Contingent payment debt instruments issued after August 12, 1996.
  6. Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206345

Zero coupon bonds.(p7)

rule
The rules for figuring OID on zero coupon bonds backed by U.S. Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206346

Corporate Debt Instruments
Issued After 1954 and
Before May 28, 1969,
and Government Debt Instruments
Issued After 1954 and
Before July 2, 1982(p7)

rule
If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. The OID, which is taxed as ordinary income, generally equals the following amount.
 number of full months
you held the debt instrument  
number of full months from date of original issue to date of maturity
Xoriginal issue discount
The balance of the gain is capital gain. If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206347

Corporate Debt Instruments
Issued After May 27, 1969,
and Before July 2, 1982(p7)

rule
If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Your basis in the debt instrument is increased by the OID you include in income.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206348

Form 1099-OID.(p7)

rule
You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Reduction for acquisition premium, later.
EIC
If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www.irs.gov/pub1212 by clicking the link under Recent Developments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206349

Form 1099-OID not received.(p7)

rule
The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID.
If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year.) If you did not hold the debt instrument the entire year, figure your OID using the following method.
  1. Divide the OID shown by 12.
  2. Multiply the result in (1) by the number of complete and partial months (for example, 61/2 months) you held the debt instrument during a calendar year. This is the OID to include in income unless you paid an acquisition premium. The reduction for acquisition premium is discussed next.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206351

Reduction for acquisition premium.(p7)

rule
If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows.
  1. Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. This is the monthly OID.
  2. Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. (If the result is zero or less, stop here. You did not pay an acquisition premium.)
  3. Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date.
  4. Subtract the amount figured in (3) from the amount figured in (1). This is the OID to include in income for each month you hold the debt instrument during the year.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206352

Transfers during the month.(p7)

rule
If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206353

Debt Instruments Issued After
July 1, 1982, and Before 1985(p7)

rule
If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. For information about showing the correct OID on your tax return, see How To Report OID, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206354

Form 1099-OID.(p7)

rule
You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Constant yield method and the discussions on acquisition premium that follow, later.
EIC
If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www.irs.gov/pub1212 by clicking the link under Recent Developments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206355

Form 1099-OID not received.(p8)

rule
The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID.
If you held the debt instrument the entire year, use the OID shown in Section I-A. (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year.) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206357
Method 1.(p8)
  1. Divide the total OID for a calendar year by 365 (366 for leap years).
  2. Multiply the result in (1) by the number of days you held the debt instrument during that particular year.

This computation is an approximation and may result in a slightly higher OID than Method 2.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206358
Method 2.(p8)
  1. Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. (See Accrual period under Constant yield method, next.)
  2. Multiply the daily OID by the number of days you held the debt instrument during that accrual period.
  3. If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period.
  4. Add the results of (2) and (3). This is the OID to include in income, unless you paid an acquisition premium. (The reduction for acquisition premium is discussed later.)
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206359

Constant yield method.(p8)

rule
This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period.
Figure the OID allocable to any accrual period as follows.
  1. Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity.
  2. Subtract from the result in (1) any qualified stated interest allocable to the accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206360
Accrual period.(p8)
An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Your tax year will usually include parts of two accrual periods.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206361
Daily OID.(p8)
The OID for any accrual period is allocated equally to each day in the accrual period. You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206362
Figuring daily OID.(p8)
The daily OID for the initial accrual period is figured using the following formula.
 (ip × ytm) − qsi 
 p 
ip=issue price
ytm=yield to maturity
qsi=qualified stated interest
p=number of days in accrual period
   
The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206363

Reduction for acquisition premium on debt instruments purchased before July 19, 1984.(p8)

rule
If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206364

Reduction for acquisition premium on debt instruments purchased after July 18, 1984.(p8)

rule
If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction.
EIC
Section I-A is available at www.irs.gov/pub1212 and clicking the link under Recent Developments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206365
Using Section I-A to figure accumulated OID.(p8)
If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts.
  1. The amount from the "Total OID to January 1, YYYY" column for your debt instrument.
  2. The OID from January 1 of a calendar year to the date of purchase, figured as follows.
    1. Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period.
    2. Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies.
    3. Add the amounts figured in (2a) and (2b).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206367

Debt Instruments
Issued After 1984(p8)

rule
If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Your basis in the debt instrument is increased by the OID you include in income. For information about showing the correct OID on your tax return, see How To Report OID, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206368

Form 1099-OID.(p8)

rule
You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Constant yield method and Reduction for acquisition premium, later.
You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later.
EIC
If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www.irs.gov/pub1212 by clicking the link under Recent Developments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206369

Form 1099-OID not received.(p8)

rule
The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID.
Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year.) If you did not hold the debt instrument the entire year, figure your OID as follows.
  1. Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. (See Accrual period under Constant yield method, later.)
  2. Multiply the daily OID by the number of days you held the debt instrument during that accrual period.
  3. Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument.
  4. Add the results of (2) and (3). This is the OID to include in income for that year, unless you paid an acquisition premium. (The reduction for acquisition premium is discussed later.)
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206371

Tax-exempt bond.(p9)

rule
If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. In general, use the rules that follow to determine your OID.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206372

Constant yield method.(p9)

rule
This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later.) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period.
Figure the OID allocable to any accrual period as follows.
  1. Multiply the adjusted issue price at the beginning of the accrual period by a fraction. The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. The yield must be stated appropriately taking into account the length of the particular accrual period.
  2. Subtract from the result in (1) any qualified stated interest allocable to the accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206373
Accrual period.(p9)
For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Any short period is included as the first accrual period.
For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206374
Daily OID.(p9)
The OID for any accrual period is allocated equally to each day in the accrual period. Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206375
Figuring daily OID.(p9)
The daily OID for the initial accrual period is figured using the following formula.
 (ip × ytm/n) − qsi 
 p 
ip=issue price
ytm=yield to maturity
n=number of accrual periods in 1 year
qsi=qualified stated interest
p=number of days in accrual period
   
The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206376

Example 5.(p9)

On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235.17. According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. The yield to maturity is 12%, compounded semiannually. The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. The accrual periods are the 6-month periods ending on each of these dates. The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). The daily OID for the first accrual period is figured as follows.
 ($86,235.17 x .12/2) – $5,000 
 181 days 
 =$174.11020 =$.96193
 181
     
The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235.17 + $174.11), or $86,409.28. The number of days for the second accrual period (July 1 through December 31) is 184 days. The daily OID for the second accrual period is figured as follows.
 ($86,409.28 x .12/2) – $5,000 
 184 days 
 =$184.55681=$1.00303
 184
Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174.11 ($.95665 × 182 days) plus $184.56 ($1.00303 × 184 days), or $358.67. Add the OID to the $10,000 interest you report on your income tax return for Year 1.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206377

Example 6.(p9)

Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Also, the interest payment dates are October 31 and April 30 of each calendar year. The accrual periods are the 6-month periods ending on each of these dates.
The number of days for the first accrual period (May 1 through October 31) is 184 days. The daily OID for the first accrual period is figured as follows.
 ($86,235.17 x .12/2) – $5,000 
 184 days 
 =$174.11020=$.94625
 184
     
The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). The daily OID for the second accrual period is figured as follows.
 ($86,409.28 x .12/2) – $5,000 
 181 days 
 =$184.55681=$1.01965
 181
If you hold the debt instrument through the end of Year 1, you must include $236.31 of OID in income. This is $174.11 ($.94625 × 184 days) for the period May 1 through October 31 plus $62.20 ($1.01965 × 61 days) for the period November 1 through December 31. The OID is added to the $5,000 interest income paid on October 31 of Year 1. Your basis in the debt instrument is increased by the OID you include in income. On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471.48 ($86,235.17 + $236.31).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206378
Short first accrual period.(p9)
You may have to make adjustments if a debt instrument has a short first accrual period. For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. (The remaining accrual periods begin on May 1 and November 1.) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. You may use any reasonable compounding method in determining OID for a short period. Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Consult your tax advisor for more information about making this computation.
The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206379

Reduction for acquisition premium.(p9)

rule
If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. To figure the daily acquisition premium, multiply the daily OID by the following fraction.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206380

Example 7.(p10)

Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. The adjusted issue price on November 1 of Year 1 is $86,409.28 ($86,235.17 + $174.11). In this case, you paid an acquisition premium of $590.72 ($87,000 − $86,409.28). The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows.
1)Daily OID on date of purchase (2nd accrual period)$1.01965*

2)

Acquisition premium
$590.72 

3)

Total OID remaining after purchase date ($13,764.83 − $174.11)
13,590.72 
4)Line 2 ÷ line 3.04346

5)

Line 1 × line 4
.04432

6)

Daily OID reduced for the acquisition premium. Line 1 − line 5
$0.97533

* As shown in Example 6.
The total OID to include in income for Year 1 is $59.50 ($.97533 × 61 days).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206381

Contingent Payment
Debt Instruments(p10)

rule
This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. If you hold a contingent payment bond, you must report OID as it accrues each year.
Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206382

Noncontingent bond method.(p10)

rule
Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206383

Form 1099-OID.(p10)

rule
The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. For example, the amount may not be correct if the contingent payment was different from the projected amount. If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. For information on showing an OID adjustment on your tax return, see How To Report OID, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206384

Figuring OID.(p10)

rule
To figure OID on a contingent payment debt instrument, you need to know the "comparable yield" and "projected payment schedule" of the debt instrument. The issuer must make these available to you.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206385
Comparable yield.(p10)
The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. The comparable yield is determined as of the debt instrument's issue date.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206386
Projected payment schedule.(p10)
The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. The projected payment schedule is created by the issuer as of the debt instrument's issue date. It is used to determine the issuer's and holder's interest accruals and adjustments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206387
Steps for figuring OID.(p10)
Figure the OID on a contingent payment debt instrument in two steps.
  1. Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Use the comparable yield as the yield to maturity. In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Do not treat any amount payable as qualified stated interest.
  2. Adjust the OID in (1) to account for actual contingent payments. If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. If the contingent payment is less than the projected fixed amount, you have a negative adjustment.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206388
Net positive adjustment.(p10)
A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Treat a net positive adjustment as additional OID for the tax year.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206389
Net negative adjustment.(p10)
A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Use a net negative adjustment to offset OID on the debt instrument for the tax year. If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206390

Basis adjustments.(p10)

rule
In general, increase your basis in a contingent payment debt instrument by the OID included in income. Your basis, however, is not affected by any negative or positive adjustments. Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206391

Treatment of gain or loss on sale or exchange.(p10)

rule
If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.
See Regulations section 1.1275-4 for exceptions to these rules.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206392

Premium, acquisition premium, and market discount.(p10)

rule
The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. See Regulations section 1.1275-4 to determine how to account for these items.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206393

Inflation-Indexed Debt Instruments(p10)

rule
This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and deflation (such as Treasury inflation-protected securities (TIPS)).
In general, if you hold an inflation-indexed debt instrument, you must report as OID any increase in the inflation-adjusted principal amount of the debt instrument that occurs while you held the debt instrument during the tax year. You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Your basis in the debt instrument is increased by the OID you include in income.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206394

Inflation-adjusted principal amount.(p10)

rule
For any date, the inflation-adjusted principal amount of an inflation-indexed debt instrument is the debt instrument's outstanding principal amount multiplied by the index ratio for that date. (For TIPS, multiply the par value by the index ratio for that date.) For this purpose, determine the outstanding principal amount as if there were no inflation or deflation over the term of the debt instrument.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206395
Index ratio.(p11)
This is a fraction, the numerator of which is the value of the reference index for the date and the denominator of which is the value of the reference index for the debt instrument's issue date.
A qualified reference index measures inflation and deflation over the term of a debt instrument. Its value is reset each month to a current value of a single qualified inflation index (for example, the nonseasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published by the Department of Labor). The value of the index for any date between reset dates is determined through straight-line interpolation.
EIC
The daily index ratios for Treasury inflation-protected securities are available on the Internet at http://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206397

Form 1099-OID.(p11)

rule
The amount shown in box 8 of the Form 1099-OID you receive for an inflation-indexed debt instrument may not be the correct amount to include in income. For example, the amount may not be correct if you bought the debt instrument other than at original issue or sold it during the year. If the amount shown in box 8 is not correct, you must figure the OID to report on your return under the following rules. For information about showing an OID adjustment on your tax return, see How To Report OID, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206398

Figuring OID.(p11)

rule
Figure the OID on an inflation-indexed debt instrument using one of the following methods.
Under the coupon bond method, figure the OID you must report for the tax year as follows.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206399
Debt instrument held at the end of the tax year.(p11)
If you held the debt instrument at the end of the tax year, figure your OID for the year using the following steps.
  1. Add the inflation-adjusted principal amount for the day after the last day of the tax year and any principal payments you received during the year. (For TIPS, multiply the par value by the index ratio for the day after the last day of the tax year, and add any principal payments received.)
  2. Subtract from (1) above the inflation-adjusted principal amount for the first day on which you held the debt instrument during the tax year. (For TIPS, subtract from (1) above the product of the par value times the index ratio for the first day held during the tax year.)
Interest is reported separately, as discussed later under Stated interest.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206400
Debt instrument sold or retired during the tax year.(p11)
If you sold the debt instrument during the tax year, or if it was retired, figure your OID for the year using the following steps.
  1. Add the inflation-adjusted principal amount for the last day on which you held the debt instrument during the tax year and any principal payments you received during the year. (For TIPS, multiply the par value by the index ratio for the sale or retirement date, and add any principal payments received.)
  2. Subtract from (1) above the inflation-adjusted principal amount for the first day on which you held the debt instrument during the tax year. (For TIPS, subtract from (1) above the product of the par value times the index ratio for the first day held during the tax year.)
Interest is reported separately, as discussed later under Stated interest.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206401

Example 8.(p11)

On February 6 of Year 9, you bought an old 10-year, 3.375% inflation-indexed debt instrument (maturing January 15 of Year 11) for $9,831. The stated principal (par value) amount is $10,000 and the inflation-adjusted principal amount for February 6 of Year 9 is $12,047.50 ($10,000 par value times 1.20475 index ratio). You held the debt instrument until August 29 of Year 9 when the inflation-adjusted principal amount was $12,275.70 ($10,000 par value times 1.22757 index ratio). Your OID for Year 9 is $228.20 ($12,275.70 − $12,047.50). Your basis in the debt instrument on August 29 of Year 9 was $10,059.20 ($9,831 cost + $228.20 OID) for Year 9.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206402
Stated interest.(p11)
Under the coupon bond method, you report any stated interest on the debt instrument under your regular method of accounting. For example, if you use the cash method, you generally include in income for the tax year any interest payments received on the debt instrument during the year.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206403

Deflation adjustments.(p11)

rule
If your calculation to figure OID on an inflation-indexed debt instrument produces a negative number, you do not have any OID. Instead, you have a deflation adjustment. A deflation adjustment generally is used to offset interest income from the debt instrument for the tax year. Show this offset as an adjustment on your Form 1040, Schedule B, in the same way you would show an OID adjustment. See How To Report OID, earlier.
You decrease your basis in the debt instrument by the deflation adjustment used to offset interest income.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206404

Example 9.(p11)

Assume the same facts as in Example 8, except that you bought the debt instrument for $9,831 on January 6 of Year 9, when the inflation-adjusted principal amount was $12,050.10, and sold the debt instrument on March 1 of Year 9, when the inflation-adjusted principal amount was $12,011.20. Because the OID calculation for Year 9 ($12,011.20 − $12,050.10) produces a negative number (negative $38.90), you have a deflation adjustment. You use this deflation adjustment to offset the stated interest reported to you on the debt instrument.
Your basis in the debt instrument on March 1 of Year 9 is $9,792.10 ($9,831 cost − $38.90 deflation adjustment) for Year 9.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206405

Premium on inflation-indexed debt instruments.(p11)

rule
In general, any premium on an inflation-indexed debt instrument is determined as of the date you acquire the debt instrument by assuming there will be no further inflation or deflation over the remaining term of the debt instrument. You allocate any premium over the remaining term of the debt instrument by making the same assumption. In general, the premium allocable to a tax year offsets the interest otherwise includible in income for the year. If the premium allocable to the year is more than that interest, the difference generally offsets the OID on the debt instrument for the year. See Regulations section 1.1275-7 for an example applying the coupon bond method to a TIPS issued with more than a de minimis amount of premium.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206406

Figuring OID on Stripped Bonds and Coupons(p11)

rule
If you strip one or more coupons from a bond and then sell or otherwise dispose of the bond or the stripped coupons, they are treated as separate debt instruments issued with OID. The holder of a stripped bond has the right to receive the principal (redemption price) payment. The holder of a stripped coupon has the right to receive an interest payment on the bond. The rule requiring the holder of a debt instrument issued with OID to include the OID in gross income as it accrues applies to stripped bonds and coupons acquired after July 1, 1982. See Debt Instruments and Coupons Purchased After July 1, 1982, and Before 1985 or Debt Instruments and Coupons Purchased After 1984, later, for information about figuring the OID to report.
Stripped bonds and coupons include the following instruments.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206407

Seller of stripped bonds or coupons.(p12)

rule
If you strip coupons from a bond and sell the bond or coupons, include in income the interest that accrued while you held the bond before the date of sale to the extent the interest was not previously included in your income. For an obligation acquired after October 22, 1986, you must also include the market discount that accrued before the date of sale of the stripped bond (or coupon) to the extent the discount was not previously included in your income.
Add the interest and market discount you include in income to the basis of the bond and coupons. This adjusted basis is then allocated between the items you keep and the items you sell, based on the fair market value of the items. The difference between the sale price of the bond (or coupon) and the allocated basis of the bond (or coupon) is the gain or loss from the sale.
Treat any item you keep as an OID bond originally issued and purchased by you on the sale date of the other items. If you keep the bond, treat the excess of the redemption price of the bond over the basis of the bond as OID. If you keep the coupons, treat the excess of the amount payable on the coupons over the basis of the coupons as OID.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206408

Purchaser of stripped bonds or coupons.(p12)

rule
If you purchase a stripped bond or coupon, treat it as if it were originally issued on the date of purchase. If you purchase the stripped bond, treat as OID any excess of the stated redemption price at maturity over your purchase price. If you purchase the stripped coupon, treat as OID any excess of the amount payable on the due date of the coupon over your purchase price.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206409

Form 1099-OID(p12)

rule
The amount shown in box 8 of the Form 1099-OID you receive for a stripped bond or coupon may not be the proper amount to include in income. If not, you must figure the OID to report on your return under the rules that follow. For information about showing an OID adjustment on your tax return, see How To Report OID, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206410

Tax-Exempt Bonds and Coupons(p12)

rule
The OID on a stripped tax-exempt bond, or on a stripped coupon from such a bond, is generally not taxable. However, if you acquired the stripped bond or coupon after October 22, 1986, you must accrue OID on it to determine its basis when you dispose of it. How you figure accrued OID and whether any OID is taxable depend on the date you bought (or are treated as having bought) the stripped bond or coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206411

Acquired before June 11, 1987.(p12)

rule
None of the OID on bonds or coupons acquired before this date is taxable. The accrued OID is added to the basis of the bond or coupon. The accrued OID is the amount that produces a yield to maturity (YTM), based on your purchase date and purchase price, equal to the lower of the following rates.
  1. The coupon rate on the bond before the separation of coupons. (However, if you can establish the YTM of the bond (with all coupons attached) at the time of its original issue, you can use that YTM instead.)
  2. The YTM of the stripped bond or coupon.
Increase your basis in the stripped tax-exempt bond or coupon by the interest that accrued but was neither paid nor previously reflected in your basis before the date you sold the bond or coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206412

Acquired after June 10, 1987.(p12)

rule
Part of the OID on bonds or coupons acquired after this date may be taxable. Figure the taxable part in three steps.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206413
Step 1. Figure OID as if all taxable.(p12)
First figure the OID following the rules in this section as if all the OID were taxable. (See Debt Instruments and Coupons Purchased After 1984, later.) Use the yield to maturity (YTM) based on the date you obtained the stripped bond or coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206414
Step 2. Determine nontaxable part.(p12)
Find the issue price that would produce a YTM as of the purchase date equal to the lower of the following rates.
  1. The coupon rate on the bond from which the coupons were separated. (However, you can use the original YTM instead.)
  2. The YTM based on the purchase price of the stripped coupon or bond.
Subtract this issue price from the stated redemption price of the bond at maturity (or, in the case of a coupon, the amount payable on the due date of the coupon). The result is the part of the OID treated as OID on a stripped tax-exempt bond or coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206415
Step 3. Determine taxable part.(p12)
The taxable part of OID is the OID determined in Step 1 minus the nontaxable part determined in Step 2.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206416
Exception.(p12)
None of the OID on your stripped tax-exempt bond or coupon is taxable if you bought it from a person who held it for sale on June 10, 1987, in the ordinary course of that person's trade or business.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206417
Basis adjustment.(p12)
Increase the basis of your stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. If you own a tax-exempt bond from which one or more coupons have been stripped, increase your basis in it by the sum of the interest accrued but not paid before you dispose of it (and not previously reflected in basis) and any accrued market discount to the extent not previously included in your income.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206418

Example 10.(p12)

Assume that a tax-exempt bond with a face amount of $100 due January 1 of Year 4 and a coupon rate of 10% (compounded semiannually) was issued for $100 on January 1 of Year 1. On January 1 of Year 2 the bond was stripped and you bought the right to receive the principal amount for $79.21. The stripped bond is treated as if it was originally issued on January 1 of Year 2 with OID of $20.79 ($100.00 − $79.21). This reflects a YTM at the time of the strip of 12% (compounded semiannually). The tax-exempt part of OID on the stripped bond is limited to $17.73. This is the difference between the redemption price ($100) and the issue price that would produce a YTM of 10% ($82.27). This part of the OID is treated as OID on a tax-exempt obligation.
The OID on the stripped bond that is more than the tax-exempt part is $3.06. This is the excess of the total OID ($20.79) over the tax-exempt part ($17.73). This part of the OID ($3.06) is treated as OID on an obligation that is not tax exempt.
The total OID allocable to the accrual period ending June 30 of Year 2 is $4.75 (6% × $79.21). Of this, $4.11 (5% × $82.27) is treated as OID on a tax-exempt obligation and $0.64 ($4.75 − $4.11) is treated as OID on an obligation that is not tax exempt. Your basis in the debt instrument as of June 30 of Year 2 is increased to $83.96 ($79.21 issue price + accrued OID of $4.75).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206419

Debt Instruments and Coupons Purchased After July 1, 1982, and Before 1985(p12)

rule
If you purchased a stripped bond or coupon after July 1, 1982, and before 1985, and you held that debt instrument as a capital asset during any part of a calendar year, you must figure the OID to be included in income using a constant yield method. Under this method, OID is allocated over the time you hold the debt instrument by adjusting the acquisition price for each accrual period. The OID for the accrual period is figured by multiplying the adjusted acquisition price at the beginning of the period by the yield to maturity.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206420

Adjusted acquisition price.(p12)

rule
The adjusted acquisition price of a stripped bond or coupon at the beginning of the first accrual period is its purchase (or acquisition) price. The adjusted acquisition price at the beginning of any subsequent accrual period is the sum of the acquisition price and all of the OID includible in income before that accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206421
Accrual period.(p12)
An accrual period for any stripped bond or coupon acquired before 1985 is each 1-year period beginning on the date of the purchase of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206422

Yield to maturity (YTM).(p12)

rule
In general, the YTM of a stripped bond or coupon is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the acquisition price of the debt instrument or coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206423
Figuring YTM.(p12)
If you purchased a stripped bond or coupon after July 1, 1982, but before 1985, and the period from your purchase date to the day the debt instrument matures can be divided exactly into full 1-year periods without including a shorter period, then the YTM can be figured by applying the following formula. taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206424
srp=stated redemption price at maturity
ap=acquisition price
m=number of full accrual periods from purchase to maturity
If the debt instrument is a stripped coupon, the stated redemption price is the amount payable on the due date of the coupon.
If the period between your purchase date and the maturity date (or due date) of the debt instrument does not divide into an exact number of full 1-year periods, so that a period shorter than 1 year must be included, consult your broker or your tax advisor for information about figuring the YTM.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206425

Daily OID.(p13)

rule
The OID for any accrual period is allocated equally to each day in the accrual period. You figure the amount to include in income by adding the daily OID amounts for each day you hold the debt instrument during the year. If your tax year includes parts of more than one accrual period (which will be the case unless the accrual period coincides with your tax year), you must include the proper daily OID amounts for each of the two accrual periods.
The daily OID for the initial accrual period is figured by applying the following formula.
 (ap × ytm) 
 p 
ap=acquisition price
ytm=yield to maturity
p=number of days in accrual period
The daily OID for subsequent accrual periods is figured in the same way except the adjusted acquisition price at the beginning of each period is used in the formula instead of the acquisition price.
The rules for figuring OID on these debt instruments are similar to those in Debt Instruments Issued After July 1, 1982, and Before 1985, earlier.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206426

Debt Instruments and Coupons
Purchased After 1984(p13)

rule
If you purchased a stripped bond or coupon (other than a stripped inflation-indexed debt instrument) after 1984, and you held that debt instrument during any part of a calendar year, you must figure the OID to be included in income using a constant yield method. Under this method, OID is allocated over the time you hold the debt instrument by adjusting the acquisition price for each accrual period. The OID for the accrual period is figured by multiplying the adjusted acquisition price at the beginning of the period by a fraction. The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year.
If the stripped bond or coupon is an inflation-indexed instrument, you must figure the OID to be included in income using the discount bond method described in Regulations section 1.1275-7(e).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206427

Adjusted acquisition price.(p13)

rule
The adjusted acquisition price of a stripped bond or coupon at the beginning of the first accrual period is its purchase (or acquisition) price. The adjusted acquisition price at the beginning of any subsequent accrual period is the sum of the acquisition price and all of the OID includible in income before that accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206428

Accrual period.(p13)

rule
For a stripped bond or coupon acquired after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the stripped bond (or payment date of a stripped coupon) or the date 6 months before that date. For example, a stripped bond that has a maturity date (or a stripped coupon that has a payment date) of March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Any short period is included as the first accrual period.
For a stripped bond or coupon acquired after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206429

Yield to maturity (YTM).(p13)

rule
In general, the YTM of a stripped bond or coupon is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the acquisition price.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206430
Figuring YTM.(p13)
How you figure the YTM for a stripped debt instrument or coupon purchased after 1984 depends on whether you have equal accrual periods or a short initial accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206431
1. Equal accrual periods.(p13)
If the period from the date you purchased a stripped bond or coupon to the maturity date can be divided evenly into full accrual periods without including a shorter period, you can figure the YTM by using the following formula. taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206432
n=number of accrual periods in 1 year
srp=stated redemption price at maturity
ap=acquisition price
m=number of full accrual periods from purchase to maturity
If the debt instrument is a stripped coupon, the stated redemption price is the amount payable on the due date of the coupon.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206433

Example 11.(p13)

On May 15 of Year 1, you bought a coupon stripped from a U.S. Treasury bond through the Department of the Treasury's STRIPS program for $38,000. An amount of $100,000 is payable on the coupon's due date, November 14 of Year 13. There are exactly 25 6-month periods between the purchase date, May 15 of Year 1, and the coupon's due date, November 14 of Year 13. The YTM on this stripped coupon is figured as follows. taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206434
Use 7.892% YTM to figure the OID for each accrual period or partial accrual period for which you must report OID.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206435
2. Short initial accrual period.(p13)
If the period from the date you purchased a stripped bond or coupon to the date of its maturity cannot be divided evenly into full accrual periods, so that a shorter period must be included, you can figure the YTM by using the following formula (the exact method). taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206436
n=number of accrual periods in 1 year
srp=stated redemption price at maturity
ap=acquisition price
r=number of days from purchase to end of short accrual period
s=number of days in accrual period ending on last day of short accrual period
m=number of full accrual periods from purchase to maturity
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206437

Example 12.(p13)

On May 30 of Year 1, you bought a coupon stripped from a U.S. Treasury bond through the Department of the Treasury's STRIPS program for $60,000. $100,000 is payable on the coupon's due date, August 11 of Year 7. You decide to figure OID using 6-month accrual periods. There are 12 full 6-month accrual periods and a 74-day short initial accrual period from the purchase date to the coupon's due date. The YTM on this stripped coupon is figured as follows.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000244941

taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206438
Use 8.406% YTM to figure the OID for each accrual period or partial accrual period for which you must report OID.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206439

Daily OID.(p13)

rule
The OID for any accrual period is allocated equally to each day in the accrual period. You must include in income the sum of the daily OID amounts for each day you hold the debt instrument during the year. Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206440
Figuring daily OID.(p13)
For the initial accrual period of a stripped bond or coupon acquired after 1984, figure the daily OID using Formula 1, next, if there are equal accrual periods. Use Formula 2 if there is a short initial accrual period.
For subsequent accrual periods, figure the daily OID using Formula 1 (whether or not there was a short initial accrual period), but use the adjusted acquisition price in the formula instead of the acquisition price.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206441
Formula 1.(p14)
  ap × ytm / n 
 p 
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206442
Formula 2.(p14)
 r
s
 
 ap x (1 + ytm /n)  − ap 
  r 
ap=acquisition price
ytm=yield to maturity
n=number of accrual periods in 1 year
p=number of days in accrual period
r=number of days from purchase to end of short accrual period
s=number of days in accrual period ending on last day of short accrual period
The rules for figuring OID on these debt instruments are similar to those illustrated in Example 5 and Example 6, earlier, under Debt Instruments Issued After 1984.
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206443

Example 13.(p14)

Assume the same facts as in Example 12, and that you held the coupon for the rest of Year 1.
For the short initial accrual period from May 30 through August 11, the daily OID is figured using Formula 2, as follows.
taxmap/pubs/p1212-004.htm#f61273t01

  74 
181
 $60,000 × (1 + .08406/2)    − $60,000 
           74 
 =$1,018.48=  $13.76327 
 74 
The OID for this period is $1,018.48 ($13.76327 × 74 days).
For the second accrual period from August 12 of Year 1 through February 11 of Year 2, the adjusted acquisition price is $61,018.48. This is the original $60,000 acquisition price plus $1,018.48 OID for the short initial accrual period. The daily OID is figured using Formula 1, as follows.
 $61,018.48 × (.08406/2)
     184
 =$2,564.60671= $13.93808
 184
The OID for the part of this period included in Year 1 (August 12 – December 31) is $1,979.21 ($13.93808 × 142 days).
The OID to be reported on your income tax return for Year 1 is $2,997.69 ($1,018.48 + $1,979.21).
taxmap/pubs/p1212-004.htm#en_us_201312_publink1000206444
Final accrual period.(p14)
The OID for the final accrual period for a stripped bond or coupon is the amount payable at maturity of the stripped bond (or interest payable on the stripped coupon) minus the adjusted acquisition price at the beginning of the final accrual period. The daily OID for the final accrual period is figured by dividing the OID for the period by the number of days in the period.