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dex ratio for the first day held during the

Your basis in the debt instrument on April 1,

bond, treat the excess of the redemption price of

2002, is $9,796.20 ($9,831 cost − $34.80 defla-

tax year.)

the bond over the basis of the bond as OID. If

tion adjustment for 2002).

you keep the coupons, treat the excess of the

Interest is reported separately, as discussed

amount payable on the coupons over the basis

later under Stated interest.

Premium on inflation-indexed debt instru-

of the coupons as OID.

ments. In general, any premium on an

Debt instrument sold or retired during the

inflation-indexed debt instrument is determined

tax year. If you sold the debt instrument during

Purchaser of stripped bond or coupon. If

as of the date you acquire the instrument by

the tax year, or if it was retired, figure your OID

you purchase a stripped bond or coupon, treat it

assuming there will be no further inflation or

for the year using the following steps.

as if it were originally issued on the date of

deflation over the remaining term of the instru-

purchase. If you purchase the stripped bond,

1) Add the inflation-adjusted principal amount

ment. You allocate any premium over the re-

treat as OID any excess of the stated redemp-

for the last day on which you held the

maining term of the instrument by making the

tion price at maturity over your purchase price. If

instrument during the tax year and any

same assumption. In general, the premium allo-

you purchase the stripped coupon, treat as OID

principal payments you received during the

cable to a tax year offsets the interest otherwise

any excess of the amount payable on the due

year. (For TIIS, multiply the par value by

includible in income for the year. If the premium

date of the coupon over your purchase price.

the index ratio for the sale or retirement

allocable to the year is more than that interest,

date, and add any principal payments re-

the difference generally offsets the OID on the

ceived.)

instrument for the year.

Form 1099 –OID

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

Figuring OID on Stripped

The amount shown in box 6 of the Form

justed principal amount for the first day on

1099 – OID you receive for a stripped bond or

Bonds and Coupons

which you held the instrument during the

coupon may not be the proper amount to include

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

in income. If not, you must figure the OID to

If you strip one or more coupons from a bond

the product of the par value times the in-

report on your return under the rules that follow.

and then sell or otherwise dispose of the bond or

dex ratio for the first day held during the

For information about showing an OID adjust-

the stripped coupons, they are treated as sepa-

tax year.)

ment on your tax return, see How To Report

rate debt instruments issued with OID. The

Interest is reported separately, as discussed

OID, earlier.

holder of a stripped bond has the right to receive

later under Stated interest.

the principal (redemption price) payment. The

holder of a stripped coupon has the right to

Example 18. On February 6, 2002, you

Tax-Exempt Bonds and Coupons

receive an interest payment on the bond. The

bought an old 10-year, 3.375% inflation-indexed

rule requiring the holder of a debt instrument

The OID on a stripped tax-exempt bond, or on a

debt instrument (maturing January 15, 2007) for

issued with OID to include the OID in gross

stripped coupon from such a bond, is generally

$9,831. The stated principal (par value) amount

income as it accrues applies to stripped bonds

not taxable. However, if you acquired the

is $10,000 and the inflation-adjusted principal

and coupons acquired after July 1, 1982. See

stripped bond or coupon after October 22, 1986,

amount for February 6, 2002, is $11,189.10

Bonds and Coupons Purchased After July 1,

you must accrue OID on it to determine its basis

($10,000 par value times 1.11891 index ratio).

1982, and Before 1985 or Bonds and Coupons

when you dispose of it. How you figure accrued

You held the debt instrument until September 1,

Purchased After 1984, later, for information

OID and whether any OID is taxable depend on

2002, when the inflation-adjusted principal

about figuring the OID to report.

the date you bought (or are treated as having

amount was $11,354.80 ($10,000 par value

Stripped bonds and coupons include the fol-

bought) the stripped bond or coupon.

times 1.13548 index ratio). Your OID for the

lowing instruments.

2002 tax year is $165.70 ($11,354.80 −

•

$11,189.10). Your basis in the debt instrument

Zero coupon instruments available

Acquired before June 11, 1987. None of the

on September 1, 2002, was $9,996.70 ($9,831

through the Department of the Treasury’s

OID on bonds or coupons acquired before this

cost + $165.70 OID for 2002).

STRIPS program and government-spon-

date is taxable. The accrued OID is added to the

sored enterprises such as the Resolution

basis of the bond or coupon. The accrued OID is

Stated interest. Under the coupon bond

Funding Corporation and the Financing

the amount that produces a yield to maturity

method, you report any stated interest on the

Corporation.

(YTM), based on your purchase date and

debt instrument under your regular method of

•

purchase price, equal to the lower of the follow-

accounting. For example, if you use the cash

Instruments backed by U.S. Treasury se-

ing rates.

method, you generally include in income for the

curities that represent ownership interests

tax year any interest payments received on the

in those securities. Examples include obli-

1) The coupon rate on the bond before the

instrument during the year.

gations backed by U.S. Treasury bonds

separation of coupons. (However, if you

that are offered primarily by brokerage

can establish the YTM of the bond (with all

Deflation adjustments. If your calculation to

firms (variously called CATS, TIGRs, etc.).

coupons attached) at the time of its origi-

figure OID on an inflation-indexed debt instru-

nal issue, you can use that YTM instead.)

ment produces a negative number, you do not

Seller of stripped bond or coupon. If you

have any OID. Instead, you have a deflation

2) The YTM of the stripped bond or coupon.

strip coupons from a bond and sell the bond or

adjustment. A deflation adjustment generally is

Increase your basis in the stripped tax-ex-

coupons, include in income the interest that ac-

used to offset interest income from the debt

crued while you held the bond before the date of

empt bond or coupon by the interest that ac-

instrument for the tax year. Show this offset as

crued but was neither paid nor previously

sale to the extent the interest was not previously

an adjustment on your Schedule B (Form 1040),

included in your income. For an obligation ac-

reflected in your basis before the date you sold

in the same way you would show an OID adjust-

the bond or coupon.

quired after October 22, 1986, you must also

ment. See How To Report OID, earlier.

You decrease your basis in the debt instru-

include the market discount that accrued before

the date of sale of the stripped bond (or coupon)

ment by the deflation adjustment used to offset

Acquired after June 10, 1987. Part of the OID

interest income.

to the extent the discount was not previously

on bonds or coupons acquired after this date

included in your income.

may be taxable. Figure the taxable part in three

Example 19. Assume the same facts as in

Add the interest and market discount you

steps.

Example 18, except that you bought the instru-

include in income to the basis of the bond and

Step 1 — Figure OID as if all taxable. First

ment for $9,831 on January 6, 2002, when the

coupons. This adjusted basis is then allocated

figure the OID following the rules in this section

inflation-adjusted principal amount was

between the items you keep and the items you

as if all the OID were taxable. (See Bonds and

$11,212.90, and sold the instrument on April 1,

sell, based on the fair market value of the items.

Coupons Purchased After 1984, later.) Use the

2002, when the inflation-adjusted principal

The difference between the sale price of the

yield to maturity (YTM) based on the date you

amount was $11,178.10. Because the OID cal-

bond (or coupon) and the allocated basis of the

obtained the stripped bond or coupon.

culation for 2002 ($11,178.10 − $11,212.90)

bond (or coupon) is the gain or loss from the

produces a negative number (negative $34.80),

sale.

Step 2 — Determine nontaxable part.

you have a deflation adjustment. You use this

Treat any item you keep as an OID bond

Find the issue price that would produce a YTM

deflation adjustment to offset the stated interest

originally issued and purchased by you on the

as of the purchase date equal to the lower of the

reported to you on the debt instrument.

sale date of the other items. If you keep the

following rates.

Page 12

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 12

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