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accrued market discount and include it in your

underpayment of tax due to either of the follow-

Form 1040 required. You must use Form

income currently and for other information about

ing reasons.

1040 (you cannot use Form 1040A or Form

market discount bonds. If you choose to use the

1040EZ) if you are reporting more or less OID

•

Negligence or disregard of rules and regu-

constant yield method to figure accrued market

than the amount shown on Form 1099 – OID,

lations.

discount, also see Figuring OID on Long-Term

other than because you are a nominee. For

•

Debt Instruments, later. The constant yield

Substantial understatement of tax.

example, if you paid a premium or an acquisition

method of figuring accrued OID, explained in

premium when you purchased the debt instru-

those discussions under Figuring OID using the

ment, you must use Form 1040 because you will

Form 1099 – OID not received. If you held an

constant yield method, is also used to figure

report less OID than shown on Form 1099 – OID.

OID instrument for 2002 but did not receive a

accrued market discount.

Also, you must use Form 1040 if you were

Form 1099 – OID, refer to the later discussions

charged an early withdrawal penalty.

under Figuring OID on Long-Term Debt Instru-

Sale, exchange, or redemption. Generally,

ments for information on the OID you must re-

you treat your gain or loss from the sale, ex-

Where to report. List each payer’s name (if a

port.

change, or redemption of a discounted bond or

brokerage firm gave you a Form 1099, list the

other debt instrument as a capital gain or loss if

brokerage firm as the payer) and the amount

Refiguring OID. You must refigure the OID

you held the bond as a capital asset. If you sold

received from each payer on line 1 of Schedule

shown in box 1 or box 6 of Form 1099 – OID to

the bond through a broker, you should receive

1 (Form 1040A) or line 1 of Schedule B (Form

determine the proper amount to include in in-

Form 1099 – B or an equivalent statement from

1040). Include all OID and periodic interest

come if one of the following applies.

the broker. Use the Form 1099 – B or other state-

shown in boxes 1, 2, and 6 of any Form

•

You bought the debt instrument at a pre-

ment and your brokerage statements to com-

1099 – OID you received for the tax year. Also

mium or at an acquisition premium.

plete Schedule D (Form 1040).

include any other OID and interest income for

•

which you did not receive a Form 1099.

Your gain or loss is the difference between

The debt instrument is a stripped bond or

coupon (including zero coupon instru-

the amount you realized on the sale, exchange,

or redemption and your basis in the debt instru-

ments backed by U.S. Treasury securi-

Showing an OID adjustment. If you use

ties).

ment. Your basis, generally, is your cost in-

Form 1040 to report more or less OID than

shown on Form 1099 – OID, list the full OID on

creased by the OID you have included in income

•

The debt instrument is a contingent pay-

each year you held it. To determine your gain or

line 1, Part I of Schedule B and follow the in-

ment or inflation-indexed debt instrument.

structions under (1) or (2), next.

loss on a tax-exempt bond, figure your basis in

See the discussions under Figuring OID on

the bond by adding to your cost the OID you

If you use Form 1040A to report the OID

Long-Term Debt Instruments or Figuring OID on

would have included in income if the bond had

shown on a Form 1099 – OID you received as a

Stripped Bonds and Coupons, later, for the spe-

been taxable.

nominee for the actual owner, list the full OID on

cific computations

line 1, Part I of Schedule 1 and follow the instruc-

See chapter 4 of Publication 550 for more

tions under (1).

information about the tax treatment of the sale or

Refiguring interest. If you disposed of a debt

redemption of discounted debt instruments.

instrument or acquired it from another holder

1) If the OID, as adjusted, is less than the

between interest dates, see the discussion

amount shown on Form 1099 – OID, show

Example 4. On November 1, 1999, Larry, a

under Bonds Sold Between Interest Dates in

the adjustment as follows.

calendar year taxpayer, bought a corporate

chapter 1 of Publication 550 for information

bond at original issue for $86,235.17. The

a) Under your last entry on line 1, subtotal

about refiguring the interest shown in box 2 of

15-year bond matures on October 31, 2014, at a

all interest and OID income listed on

Form 1099 – OID.

stated redemption price of $100,000. The bond

line 1.

provides for semiannual payments of interest at

Nominee. If you are the holder of an OID in-

10%. Assume the bond is a capital asset in

b) Below the subtotal, write “Nominee Dis-

strument and you receive a Form 1099 – OID

Larry’s hands. The bond has $13,764.83 of OID

tribution” or “OID Adjustment” and show

that shows your taxpayer identification number

($100,000 stated redemption price at maturity

the OID you are not required to report.

and includes amounts belonging to another per-

minus $86,235.17 issue price).

c) Subtract that OID from the subtotal and

son, you are considered a “nominee.” You must

On November 1, 2002, Larry sold the bond

enter the result on line 2.

file another Form 1099 – OID for each actual

for $90,000. Including the OID he will report for

owner, showing the OID for the owner. Show the

the period he held the bond in 2002, Larry has

2) If the OID, as adjusted, is more than the

owner of the instrument as the “recipient” and

included $1,214.48 of OID in income and has

amount shown on Form 1099 – OID, show

you as the “payer.”

increased his basis by that amount to

the adjustment as follows.

Complete Form 1099 – OID and Form 1096

$87,449.65. Larry has realized a gain of

and file the forms with the Internal Revenue

a) Under your last entry on line 1, subtotal

$2,550.35. All of Larry’s gain is capital gain.

Service Center for your area. You must also give

all interest and OID income listed on

a copy of the Form 1099 – OID to the actual

Form 1099–OID

line 1.

owner. However, you are not required to file a

b) Below the subtotal, write “OID Adjust-

nominee return to show amounts belonging to

The issuer of the debt instrument (or your bro-

ment” and show the additional OID.

your spouse. See the Form 1099 instructions for

ker, if you purchased or held the instrument

more information.

c) Add that OID to the subtotal and enter

through a broker) should give you a copy of

When preparing your tax return, follow the

the result on line 2.

Form 1099 – OID or a similar statement if the

instructions under Showing an OID adjustment

accrued OID for the calendar year is $10 or

in the next discussion.

more and the term of the instrument is more than

Figuring OID on

1 year. Form 1099 – OID shows all OID income

How To Report OID

in box 1 except OID on a U.S. Treasury obliga-

Long-Term Debt Instruments

tion, which is shown in box 6. It also shows, in

Generally, you report your taxable interest and

box 2, any qualified stated interest you must

How you figure the OID on a long-term debt

OID income on line 2, Form 1040EZ; line 8a,

include in income. (However, any qualified

instrument depends on the date it was issued. It

Form 1040A; or line 8a, Form 1040.

stated interest on Treasury inflation-indexed se-

also may depend on the type of the instrument.

curities that is not OID can be reported in box 3

There are different rules for each of the following

Form 1040 or Form 1040A required. You

of Form 1099 – INT.) A copy of Form 1099 – OID

debt instruments.

must use Form 1040 or Form 1040A (you cannot

will be sent to the IRS. Do not attach your copy

use Form 1040EZ) under either of the following

to your tax return. Keep it for your records.

1) Corporate debt instruments issued after

conditions.

1954 and before May 28, 1969, and gov-

If you are required to file a tax return

•

You received a Form 1099 – OID as a

ernment instruments issued after 1954 and

and you receive Form 1099 – OID

nominee for the actual owner.

before July 2, 1982.

showing taxable amounts, you must

CAUTION

•

report these amounts on your return. A 20%

Your total interest and OID income for the

2) Corporate debt instruments issued after

accuracy-related penalty may be charged for

year was more than $1,500.

May 27, 1969, and before July 2, 1982.

Page 6

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 6

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