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ments, holders and issuers must use the non-

Net positive adjustment. A net positive ad-

ing principal amount as if there were no inflation

justment exists when the total of any positive

or deflation over the term of the instrument.

contingent bond method.

adjustments described in (2) above is more than

Index ratio. This is a fraction, the numerator

the total of any negative adjustments. Treat a

Noncontingent bond method.

Under this

of which is the value of the reference index for

net positive adjustment as additional OID for the

method, the issuer must construct a hypothetical

the date and the denominator of which is the

tax year.

noncontingent bond that has terms and condi-

value of the reference index for the instrument’s

tions similar to the contingent payment debt in-

Net negative adjustment. A net negative

issue date.

strument. The issuer constructs the payment

adjustment exists when the total of any negative

A qualified reference index measures infla-

schedule of the hypothetical noncontingent

adjustments described in (2) above is more than

tion and deflation over the term of a debt instru-

bond by projecting a fixed amount for each con-

the total of any positive adjustments. Use a net

ment. Its value is reset each month to a current

tingent payment. Holders and issuers accrue

negative adjustment to offset OID on the debt

value of a single qualified inflation index (for

OID on this hypothetical noncontingent bond

instrument for the tax year. If the net negative

example, the nonseasonally adjusted U.S. City

using the constant yield method that applies to

adjustment is more than the OID on the debt

Average All Items Consumer Price Index for All

fixed payment debt instruments. When a contin-

instrument for the tax year, you can claim the

Urban Consumers (CPI-U), published by the

gent payment differs from the projected fixed

difference as an ordinary loss. However, the

Bureau of Labor Statistics of the Department of

amount, the holders and issuers make adjust-

amount you can claim as an ordinary loss is

Labor). The value of the index for any date

ments to their OID accruals. If the actual contin-

limited to the OID on the debt instrument you

between reset dates is determined through

gent payment is larger than expected, both the

included in income in prior tax years. You must

straight-line interpolation.

issuer and the holder increase their OID accru-

carry forward any net negative adjustment that

The daily index ratios for Treasury

als. If the actual contingent payment is smaller

is more than the total OID for the tax year and

than expected, holders and issuers generally

inflation-indexed securities are avail-

prior tax years and treat it as a negative adjust-

able on the Internet at www.

decrease their OID accruals.

ment in the next tax year.

publicdebt.treas.gov.

Basis adjustments. In general, increase your

Form 1099 – OID. The amount shown in box 1

basis in a contingent payment debt instrument

of the Form 1099 – OID you receive for a contin-

by the OID included in income. Your basis, how-

gent payment debt instrument may not be the

Form 1099 – OID. The amount shown in box 6

ever, is not affected by any negative or positive

correct amount to include in income. For exam-

of the Form 1099 – OID you receive for an

adjustments. Decrease your basis by any non-

ple, the amount may not be correct if the contin-

inflation-indexed debt instrument may not be the

contingent payment received and the projected

gent payment was different from the projected

correct amount to include in income. For exam-

contingent payment scheduled to be received.

amount. If the amount in box 1 is not correct, you

ple, the amount may not be correct if you bought

must figure the OID to report on your return

the debt instrument (other than at original issue)

Treatment of gain or loss on sale or ex-

under the following rules. For information on

or sold it during the year. If the amount shown in

change. If you sell a contingent payment debt

showing an OID adjustment on your tax return,

box 6 is not correct, you must figure the OID to

instrument at a gain, your gain is ordinary in-

see How To Report OID, earlier.

report on your return under the following rules.

come (interest income), even if you hold the

For information about showing an OID adjust-

instrument as a capital asset. If you sell a contin-

Figuring OID. To figure OID on a contingent

ment on your tax return, see How To Report

gent payment debt instrument at a loss, your

payment debt instrument, you need to know the

OID, earlier.

loss is an ordinary loss to the extent of your prior

“comparable yield” and “projected payment

OID accruals on the instrument. If the instrument

schedule” of the debt instrument. The issuer

Figuring OID.

Figure the OID on an

is a capital asset, treat any loss that is more than

must make these available to you.

inflation-indexed debt instrument using one of

your prior OID accruals as a capital loss.

the following methods.

Comparable yield. The comparable yield is

See section 1.1275 – 4 of the regulations for

the yield on the hypothetical noncontingent bond

exceptions to these rules.

•

The coupon bond method, described in

that the issuer determines and constructs at the

the following discussion, applies if the in-

Premium, acquisition premium, and market

time of issuance.

strument is issued at par, all stated inter-

discount. The rules for accruing premium, ac-

Projected payment schedule. The pro-

est payable on the instrument is qualified

quisition premium, and market discount do not

jected payment schedule is the payment sched-

stated interest, and the coupons have not

apply to a contingent payment debt instrument.

been stripped from the instrument. This

ule of the hypothetical noncontingent bond. The

See section 1.1275 – 4 of the regulations to de-

schedule includes all fixed payments due under

method generally applies, for example, to

termine how to account for these items.

Treasury inflation-indexed securities.

the contingent payment debt instrument and a

projected fixed amount for each contingent pay-

•

The discount bond method applies to

ment. The projected payment schedule is cre-

Inflation-Indexed Debt Instruments

any inflation-indexed debt instrument that

ated by the issuer. It is used to determine the

does not qualify for the coupon bond

holder’s interest accruals and adjustments.

This discussion shows how you figure OID on

method, such as a stripped instrument.

certain inflation-indexed debt instruments is-

Steps for figuring OID. Figure the OID on a

This method is described in section

sued after January 5, 1997. An inflation-in-

contingent payment debt instrument in two

1.1275 – 7(e) of the regulations.

dexed debt instrument is generally a debt

steps.

Under the coupon bond method, figure the OID

instrument on which the payments are adjusted

you must report for the tax year as follows.

for inflation and deflation (such as Treasury

1) Figure the OID on the hypothetical non-

inflation-indexed securities (TIIS)).

contingent bond using the constant yield

Debt instrument held at the end of the tax

In general, if you hold an inflation-indexed

method (discussed earlier under Debt In-

year. If you held the debt instrument at the end

debt instrument, you must report as OID any

struments Issued After 1984 ) that applies

of the tax year, figure your OID for the year using

increase in the inflation-adjusted principal

to fixed payment debt instruments. Use the

the following steps.

amount of the instrument that occurs while you

comparable yield as the yield to maturity.

held the instrument during the tax year. You

Use the projected payment schedule to

1) Add the inflation-adjusted principal amount

must include the OID in gross income whether or

determine the hypothetical bond’s adjusted

for the day after the last day of the tax year

not you hold the instrument as a capital asset.

issue price at the beginning of the accrual

and any principal payments you received

Your basis in the instrument is increased by the

period. Do not treat any amount payable

during the year. (For TIIS, multiply the par

OID you include in income.

as qualified stated interest.

value by the index ratio for the day after

the last day of the tax year, and add any

2) Adjust the OID in (1) to account for actual

Inflation-adjusted principal amount. For

principal payments received.)

contingent payments. If the contingent

any date, the inflation-adjusted principal amount

payment is greater than the projected fixed

of an inflation-indexed debt instrument is the

2) Subtract from (1) above the inflation-ad-

amount, you have a positive adjustment. If

instrument’s outstanding principal amount multi-

justed principal amount for the first day on

the contingent payment is less than the

plied by the index ratio for that date. (For TIIS,

which you held the instrument during the

projected fixed amount, you have a nega-

multiply the par value by the index ratio for that

tax year. (For TIIS, subtract from (1) above

tive adjustment.

date.) For this purpose, determine the outstand-

the product of the par value times the in-

Page 11

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 11

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