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adjusting the acquisition price for each accrual

Daily OID. The OID for any accrual period is

1) The coupon rate on the bond from which

allocated equally to each day in the accrual

period. The OID for the accrual period is figured

the coupons were separated. (However,

period. You figure the amount to include in in-

by multiplying the adjusted acquisition price at

you can use the original YTM instead.)

come by adding the daily OID amounts for each

the beginning of the period by the yield to matur-

day you hold the debt instrument during the

ity.

2) The YTM based on the purchase price of

year. If your tax year includes parts of more than

the stripped coupon or bond.

one accrual period (which will be the case un-

Adjusted acquisition price. The adjusted ac-

Subtract this issue price from the stated re-

less the accrual period coincides with your tax

quisition price of a stripped bond or coupon at

demption price of the bond at maturity (or, in the

year), you must include the proper daily OID

the beginning of the first accrual period is its

case of a coupon, the amount payable on the

amounts for each of the two accrual periods.

purchase (or acquisition) price. The adjusted

due date of the coupon). The result is the part of

The daily OID for the initial accrual period

acquisition price at the beginning of any subse-

the OID treated as OID on a stripped tax-exempt

is figured by applying the following formula.

quent accrual period is the sum of the acquisi-

bond or coupon.

tion price and all of the OID includible in income

(ap × ytm)

Step 3 — Determine taxable part. The

before that accrual period.

taxable part of OID is the OID determined in

Accrual period. An accrual period for any

Step 1 minus the nontaxable part determined in

stripped bond or coupon acquired before 1985 is

ap = acquisition price

Step 2.

each 1-year period beginning on the date of the

ytm = yield to maturity

Exception. None of the OID on your

purchase of the obligation and each anniversary

p = number of days in accrual period

stripped tax-exempt bond or coupon is taxable if

thereafter, or the shorter period to maturity for

you bought it from a person who held it for sale

the last accrual period.

The daily OID for subsequent accrual peri-

on June 10, 1987, in the ordinary course of that

ods is figured in the same way except the ad-

person’s trade or business.

Yield to maturity (YTM). In general, the YTM

justed acquisition price at the beginning of each

of a stripped bond or coupon is the discount rate

Basis adjustment. Increase the basis of

period is used in the formula instead of the

that, when used in figuring the present value of

your stripped tax-exempt bond or coupon by the

acquisition price.

all principal and interest payments, produces an

taxable and nontaxable accrued OID. If you own

The rules for figuring OID on these instru-

amount equal to the acquisition price of the bond

a tax-exempt bond from which one or more

ments are similar to those illustrated in Example

or coupon.

coupons have been stripped, increase your ba-

9 and Example 10, earlier, under Debt Instru-

sis in it by the sum of the interest accrued but not

ments Issued After July 1, 1982, and Before

Figuring YTM. If you purchased a stripped

paid before you dispose of it (and not previously

bond or coupon after July 1, 1982, but before

1985.

reflected in basis) and any accrued market dis-

1985, and the period from your purchase date to

count to the extent not previously included in

the day the instrument matures can be divided

your income.

Bonds and Coupons

exactly into full 1-year periods without including

Purchased After 1984

a shorter period, then the YTM can be figured by

Example 20. Assume that a tax-exempt

applying the following formula.

bond with a face amount of $100 due January 1,

If you purchased a stripped bond or coupon

2004, and a coupon rate of 10% (compounded

(other than a stripped inflation-indexed instru-

semiannually) was issued for $100 on January

ment) after 1984, and you held that debt instru-

1, 2001. On January 1, 2002, the bond was

ment during any part of 2002, you must figure

srp

( )

stripped and you bought the right to receive the

the OID to be included in income using a con-

– 1

principal amount for $79.21. The stripped bond

stant yield method. Under this method, OID is

is treated as if it were originally issued on Janu-

allocated over the time you hold the debt instru-

ary 1, 2002, with OID of $20.79 ($100.00 −

srp = stated redemption price at maturity

ment by adjusting the acquisition price for each

$79.21). This reflects a YTM at the time of the

accrual period. The OID for the accrual period is

ap = acquisition price

strip of 12% (compounded semiannually). The

figured by multiplying the adjusted acquisition

m = number of full accrual periods from

tax-exempt part of OID on the stripped bond is

price at the beginning of the period by a fraction.

purchase to maturity

limited to $17.73. This is the difference between

The numerator of the fraction is the instrument’s

the redemption price ($100) and the issue price

yield to maturity and the denominator is the

If the instrument is a stripped coupon, the

that would produce a YTM of 10% ($82.27). This

number of accrual periods per year.

stated redemption price is the amount payable

part of the OID is treated as OID on a tax-ex-

on the due date of the coupon. See Example 21.

If the stripped bond or coupon is an

empt obligation.

inflation-indexed instrument, you must figure the

If the period between your purchase date

The OID on the stripped bond that is more

OID to be included in income using the discount

and the maturity date (or due date) of the instru-

than the tax-exempt part is $3.06. This is the

bond method described in section 1.1275 – 7(e)

ment does not divide into an exact number of full

excess of the total OID ($20.79) over the tax-ex-

of the regulations.

1-year periods, so that a period shorter than 1

empt part ($17.73). This part of the OID ($3.06)

year must be included, consult your broker or

is treated as OID on an obligation that is not tax

Adjusted acquisition price. The adjusted ac-

your tax advisor for information about figuring

exempt.

quisition price of a stripped bond or coupon at

the YTM.

the beginning of the first accrual period is its

The total OID allocable to the accrual period

ending June 30, 2002, is $4.75 (6% × $79.21).

purchase (or acquisition) price. The adjusted

Example 21. On November 15, 1984, you

Of this, $4.11 (5% × $82.27) is treated as OID on

acquisition price at the beginning of any subse-

bought a coupon stripped from a U.S. Treasury

a tax-exempt obligation and $0.64 ($4.75 −

quent accrual period is the sum of the acquisi-

bond through the Department of the Treasury’s

tion price and all of the OID includible in income

STRIPS program for $20,000. An amount of

$4.11) is treated as OID on an obligation that is

before that accrual period.

$100,000 is payable on the coupon’s due date,

not tax exempt. Your basis in the bond is in-

creased to $83.96 ($79.21 issue price + accrued

November 14, 2009. There are exactly 25

Accrual period. For a stripped bond or cou-

1-year periods between the purchase date, No-

OID of $4.75).

pon acquired after 1984 and before April 4,

vember 15, 1984, and the coupon’s due date,

1994, an accrual period is each 6-month period

November 14, 2009. Your YTM on this stripped

Bonds and Coupons Purchased

that ends on the day that corresponds to the

coupon is figured as follows.

stated maturity date of the stripped bond (or

After July 1, 1982, and Before 1985

payment date of a stripped coupon) or the date 6

(

)

$100,000

If you purchased a stripped bond or coupon after

months before that date. For example, a

– 1

$20,000

July 1, 1982, and before 1985, and you held that

stripped bond that has a maturity date (or a

debt instrument as a capital asset during any

= (1.06649 -1) = 0.06649 = 6.649%

stripped coupon that has a payment date) of

part of 2002, you must figure the OID to be

March 31 has accrual periods that end on Sep-

included in income using a constant yield

Use 6.649% YTM to figure the OID for each

tember 30 and March 31 of each calendar year.

accrual period or partial accrual period for which

method. Under this method, OID is allocated

Any short period is included as the first accrual

over the time you hold the debt instrument by

you must report OID.

period.

Page 13

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 13

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