Form 1099-OID, Original Issue Discount: Boxes, Reporting, and Basis

A 1099-OID is the tax form a broker or debt issuer sends you to report Original Issue Discount, which is interest the IRS treats you as having earned on a bond or similar debt instrument that was first sold below its face value, even if no cash was paid to you during the year. You’ll get one whenever the OID credited to your account reaches at least $10 for the calendar year, and the amount shown becomes taxable interest income on your return.¹

Why the IRS Taxes Income You Never Received

Original Issue Discount is the gap between a debt instrument’s face value and the lower price at which it was first sold.² If a company issues a $1,000 bond for $950, that $50 spread is OID. Rather than letting you defer tax on the full spread until the bond matures, the IRS treats it as interest you earn gradually while you hold the bond. A portion is added to your taxable income each year whether or not the issuer sends you a check.³

That yearly slice isn’t a flat split. OID accrues under a constant-yield method, so the amount is smaller in the early years and grows over time. The figure on your 1099-OID can shift from year to year even though you own the exact same bond.

Investments That Produce a 1099-OID

Zero-coupon bonds are the classic example. Because they pay no interest until maturity, the entire return is the discount at issuance, and all of it accrues as OID year by year. Many investors are surprised the first time they owe tax on income they haven’t touched.

Treasury bills are another common source. T-bills are always sold at a discount and mature in a year or less, so the discount is short-term OID. Some corporate and municipal bonds carry OID as well when the offering price sits far enough below face value.

Certificates of deposit can generate OID too. If a CD has a term longer than one year and the interest isn’t paid out at least annually, the issuer must report the accruing interest on a 1099-OID.⁴

What Each Box on the Form Means

Not every box will show a figure for every instrument you hold. What matters is knowing what a number means when it appears.

Box 1: Original Issue Discount

The main figure on the form. It’s the taxable OID that accrued while you held the debt instrument during the year, and it goes on your return as interest income regardless of whether you received any cash.⁵

Box 2: Other Periodic Interest

Some OID instruments also pay stated interest, similar to a coupon. Box 2 captures cash interest the issuer actually paid you during the year, separate from the imputed income in Box 1.⁵

Box 3: Early Withdrawal Penalty

If you cashed in a CD or similar time deposit before maturity and forfeited interest or principal as a penalty, the forfeited amount shows here.⁶ You can deduct it as an adjustment to gross income on Schedule 1 of Form 1040, whether or not you itemize.

Box 4: Federal Income Tax Withheld

Backup withholding taken out of your OID income, usually because a correct taxpayer identification number wasn’t on file with the payer. Claim this amount as a tax payment on your return.⁷

Box 6: Acquisition Premium

If you bought an OID bond on the secondary market for more than its adjusted issue price but still below face value, the extra you paid is an acquisition premium. It reduces the OID you owe tax on. Some brokers already net Box 6 against Box 1; others don’t, in which case you make the adjustment when you file.⁷

Box 8: OID on U.S. Treasury Obligations

OID on Treasury bills, notes, and bonds issued at a discount appears here instead of Box 1.⁵ Treasury OID is subject to federal income tax but generally exempt from state and local taxes, which matters if you live in a high-tax state.

Box 10: Bond Premium

Applies when you bought a taxable bond for more than its face value. Box 10 shows the portion of that premium your broker amortized against the interest you received during the year.⁵ Don’t confuse it with acquisition premium in Box 6: acquisition premium applies to OID bonds bought above the adjusted issue price but below face; bond premium applies to any bond bought above face.

Box 11: Tax-Exempt OID

OID accrued during the year on a tax-exempt municipal bond issued at a discount. It’s generally not subject to federal income tax, but you still track it because it affects your basis in the bond.⁷

Reporting a 1099-OID on Your Tax Return

The OID from Box 1 and any periodic interest from Box 2 go on Schedule B (Interest and Ordinary Dividends) of Form 1040. You’re required to file Schedule B if your total taxable interest or ordinary dividends exceed $1,500 for the year.⁸ List each payer by name on line 1, then carry the total to the taxable interest line on Form 1040.

Adjusting for Acquisition Premium

If Box 6 shows an acquisition premium and your broker did not already reduce Box 1, make the adjustment yourself. Report the full Box 1 amount on Schedule B, then enter a subtraction below it labeled “OID Adjustment.” The net figure flows to your Form 1040 total.⁸ If your broker already reported a net OID amount that reflects the offset, don’t reduce it a second time.

Nominee Reporting

Sometimes a 1099-OID lands in your name even though part of the income belongs to someone else, like a co-owner. Report the full amount on line 1 of Schedule B, then subtract the other person’s share with a “Nominee Distribution” notation. You also send that person their own 1099-OID and file the corresponding Forms 1096 and 1099-OID with the IRS.⁹

How OID Changes Your Cost Basis

Reporting OID each year pays off later. Every dollar of OID you include in income increases your tax basis in the bond by the same amount.³ When you sell or redeem the bond, you subtract the adjusted basis from what you receive to figure your gain or loss.

Say you bought a bond at issuance for $87,000. Over several years, you include $1,214 of OID in your income, bringing your adjusted basis to $88,214. If you then sell for $90,000, your capital gain is $1,786, not $3,000. Skip the basis adjustment and you’d effectively pay tax twice on the OID you already reported.³

The same logic applies to tax-exempt bonds. Even though the OID on a municipal bond isn’t taxed, you still increase your basis by the amount that would have been includable if the bond were taxable.³ Skipping this step overstates your gain when you sell.

Market Discount Is Not the Same as OID

These get confused because both involve buying a bond below face value. OID exists from the day the bond is first issued at a discount. Market discount arises later, when you buy an already-issued bond on the secondary market for less than its current adjusted issue price.

The tax treatment isn’t the same either. OID must be included in your income each year. Market discount is generally optional on a year-by-year basis: unless you elect to report it annually by notifying your broker in writing, you can defer the income until you sell or redeem the bond.³ If you do elect annual accrual, your broker reports the market discount in Box 5 of Form 1099-OID. Mixing them up can lead to reporting income you could have deferred, or deferring income you were required to report.

What Happens If You Don’t Report the OID

Your broker sends the same 1099-OID data to the IRS, so the agency’s computers will flag a mismatch if the amount doesn’t appear on your return. The IRS Automated Underreporter system compares every 1099 filed against what you reported on your Form 1040.¹⁰ When it finds a discrepancy, an examiner reviews the return and typically sends a CP2000 notice proposing additional tax.

A CP2000 is not a bill. It’s a proposal showing what the IRS thinks you owe based on the mismatch. You can agree, partially agree, or dispute it by the response deadline. Ignore it and the next step is a Statutory Notice of Deficiency, which is a formal move toward assessment and collection.¹⁰

On top of the additional tax, the IRS can impose an accuracy-related penalty equal to 20% of the underpayment when the understatement is substantial. For individuals, an understatement counts as substantial if it exceeds the greater of 10% of the tax that should have been shown or $5,000.¹¹ With a large OID position, or several unreported instruments, hitting that threshold is easier than most people expect.

1
Internal Revenue Service. About Form 1099-OID, Original Issue Discount
2
Cornell Law Institute. 26 USC 1273(a)(1) – Definition: Original Issue Discount
3
Internal Revenue Service. Publication 1212 (12/2025), Guide to Original Issue Discount (OID) Instruments
4
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID (01/2024) – Section: Specific Instructions for Form 1099-OID
5
Internal Revenue Service. Publication 1212 (12/2025), Guide to Original Issue Discount (OID) Instruments – Section: Form 1099-OID
6
Internal Revenue Service. Form 1099-OID Instructions
7
Internal Revenue Service. Form 1099-OID (Rev. January 2024)
8
Internal Revenue Service. Instructions for Schedule B (Form 1040) (2025) – Section: Interest and Ordinary Dividends
9
Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
10
Internal Revenue Service. Topic No. 652, Notice of Underreported Income – CP2000
11
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments