What Is OID: Original Issue Discount, Accrual, and Reporting

Original issue discount, or OID, is a form of interest that shows up when a bond or other debt instrument is issued for less than what the holder will collect at maturity. The gap between the issue price and the maturity payout is the OID, and federal tax law generally treats a slice of it as interest income every year you hold the instrument, even in years you receive no cash. That annual reporting duty is what catches most investors by surprise.

How the Tax Code Defines OID

OID equals the excess of a debt instrument’s stated redemption price at maturity over its issue price.¹ The stated redemption price at maturity is the total of all payments the instrument will make, minus any qualified stated interest — interest paid at a fixed rate in regular installments of one year or less. The issue price is what the debt originally sold for when first offered to the public.

A short example: a corporation issues a bond for $920 that will pay $1,000 at maturity and makes no periodic interest payments. The $80 gap is OID. Even though the holder collects that $80 only when the bond matures, the code treats it as interest income that accrues gradually over the life of the bond.

Why OID Creates a Tax Bill Without Cash

Holders of an OID instrument must include a portion of the discount in gross income for every day they own the bond during the tax year.² That produces tax liability each year even when no cash changes hands, a result sometimes called phantom income. Cash-basis taxpayers, who normally recognize income only when they physically receive it, are pushed into an accrual pattern for OID.

How the Annual Amount Is Figured

The IRS requires the constant yield method, sometimes called the yield-to-maturity method.³ Mechanically, you multiply the adjusted issue price at the start of each accrual period by the yield to maturity (adjusted for the number of accrual periods per year), subtract any qualified stated interest payable in that period, then split the result across the days in the period to get a daily OID. You add the daily amounts for every day you held the bond during your tax year.

Because the adjusted issue price grows each period by the OID already included in income, the taxable amount rises as the bond approaches maturity. The annual accrual is smaller in the early years and larger later on. The compounding mirrors the way interest actually accumulates on a discount instrument.

In practice, your broker or the issuer will do this math and report the number to you. What matters is knowing the figure is not optional and not tied to cash you received.

When Annual OID Accrual Does Not Apply

Several categories of debt sit outside the yearly accrual requirement even when a discount technically exists.²

Tax-exempt municipal bonds with OID are generally not subject to federal income tax on that discount, the same as their regular interest. The OID still appears on Form 1099-OID in Box 11 for informational purposes and is reported as tax-exempt interest on your return.⁴
U.S. savings bonds (Series EE and I) let you defer reporting until you cash the bond or it matures. You receive a single Form 1099-INT in the year of redemption showing all accumulated interest.⁵
Short-term obligations with a fixed maturity date of one year or less from issue fall under a separate set of rules, not the standard OID accrual regime.⁶
Loans between individuals outside of business are exempt if the total outstanding balance between the same two people does not exceed $10,000 and tax avoidance is not a principal purpose of the loan.

Treasury bonds, notes, and bills with OID sit in their own lane. The OID is federally taxable but exempt from state and local income tax, matching the treatment of ordinary Treasury interest.⁷ On Form 1099-OID, Treasury OID appears in Box 8 rather than Box 1.

The De Minimis Rule

A small enough discount is treated as zero OID. Multiply 0.25% of the stated redemption price at maturity by the number of complete years to maturity. If the actual discount is less than that figure, no annual accrual is required.¹

For a bond with a $1,000 face value and ten years to maturity, the de minimis threshold is $25 (0.25% × $1,000 × 10). If the bond was issued at $980, the $20 discount is below the threshold and no annual OID reporting applies.

When the discount is de minimis, any gain on sale or redemption is treated as capital gain, provided the bond is a capital asset in your hands.⁸ The tax is deferred to sale, and potentially qualifies for long-term capital gains rates.

Where You Are Likely to See OID

Zero-coupon bonds are the clearest case. They pay no periodic interest at all, so the entire return is the difference between your discounted purchase price and the face value at maturity.³ You owe tax on the accruing OID each year, no cash arriving in between.

Stripped bonds and stripped coupons also carry OID. When a financial institution separates a bond’s principal from its interest payments and sells each piece at a discount, each piece is treated as a new debt instrument issued with OID on the date of the strip or the date you buy it, whichever is later.⁹ The same annual accrual rules apply.

OID Versus Market Discount

OID and market discount often get mixed up. OID exists from the day a debt instrument is first issued below its redemption value. Market discount arises later, when you buy a previously issued bond on the secondary market for less than its current adjusted issue price, usually because interest rates have moved up since the bond came out.

Timing is the practical difference. OID accrual is mandatory each year, cash or no cash. Market discount inclusion is generally elective; you can report it as it accrues or wait until sale or redemption, at which point the gain attributable to market discount is ordinary income rather than capital gain.³ Treating one like the other leads to either premature reporting or a surprise at sale.

Acquisition Premium Reduces Reportable OID

If you bought an OID bond on the secondary market for more than its adjusted issue price but still less than the stated redemption price at maturity, the extra amount you paid is acquisition premium. Acquisition premium reduces the OID you have to report each year.³

The reduction works through a fraction: acquisition premium divided by the total OID remaining from your purchase date to maturity, applied against the daily OID. If you paid so much that your purchase price actually exceeds the total of all remaining payments other than qualified stated interest, you are considered to have bought at a premium and generally report no OID at all.

Your Basis Goes Up as You Report OID

Each year you include OID in income, your tax basis in the bond rises by the same amount.¹⁰ The step-up prevents double taxation. Because you already paid tax on the accruing discount year by year, your basis climbs so the same income is not taxed again as capital gain when you sell.

Say you buy a zero-coupon bond at issue for $800 with a $1,000 face value and a ten-year maturity. Over the first five years, you include $90 of OID in income (the exact figure depends on the yield-to-maturity math). Your adjusted basis is now $890. If you sell at that point for $900, your taxable gain is $10, not the $100 gap between the original purchase price and the sale price.

Skipping these annual basis increases leaves you with an artificially low basis and an overstated capital gain at sale. That produces tax on the same income twice.³

How OID Gets Reported: Form 1099-OID and Schedule B

Your broker or the issuer files Form 1099-OID with the IRS and sends you a copy whenever the accrued OID for the calendar year is $10 or more and the instrument’s term exceeds one year.³ The $10 threshold traces back to the general interest-reporting rule for payers.¹¹

The boxes that matter on Form 1099-OID:

Box 1: total taxable OID for the year (other than Treasury OID); report as interest income.⁴
Box 2: any qualified stated interest the bond paid in cash during the year.
Box 7: the CUSIP number or a description of the debt instrument.
Box 8: OID on U.S. Treasury obligations (federally taxable, exempt from state and local tax).
Box 11: tax-exempt OID on covered municipal bonds acquired on or after January 1, 2017.

For the 2025 tax year, your broker must furnish the form to you by February 2, 2026.¹² You report the taxable OID on Schedule B (Form 1040), Line 1, alongside your other interest income. If your correct number differs from Box 1 (for example, because of an acquisition premium adjustment), list the full Box 1 amount on Schedule B and subtract the difference on a separate line labeled “OID Adjustment.”¹³ Tax-exempt OID from Box 11 goes on Line 2a of Form 1040 or 1040-SR as tax-exempt interest.

The IRS matches the 1099-OID amounts against your return. Numbers that do not line up without an explained adjustment invite an IRS notice.⁴

What Happens If You Leave OID Off Your Return

Because OID is on an information return filed with the IRS, an omission is easy to spot. If you underreport your tax as a result, you can face an accuracy-related penalty of 20% of the underpayment attributable to the error.¹⁴

Two triggers are common in OID cases. Not including income shown on an information return is specifically listed by the IRS as negligence, which carries the 20% penalty on the underpayment caused by the omission. And if your total tax understatement exceeds the greater of 10% of the tax you should have shown or $5,000, the same 20% penalty applies as a substantial understatement. Interest runs on unpaid penalty balances. Keeping a running record of your annual OID accruals and basis adjustments is the simplest defense.

1
Office of the Law Revision Counsel. 26 U.S.C. 1273 – Determination of Amount of Original Issue Discount
2
Office of the Law Revision Counsel. 26 U.S.C. 1272 – Current Inclusion in Income of Original Issue Discount
3
Internal Revenue Service. Publication 1212 (12/2025), Guide to Original Issue Discount (OID) Instruments
4
Internal Revenue Service. Form 1099-OID (Rev. January 2024) Original Issue Discount
5
TreasuryDirect. Tax Information for EE and I Bonds
6
Office of the Law Revision Counsel. 26 U.S.C. 1283 – Definitions and Special Rules
7
TreasuryDirect. Tax Forms and Tax Withholding
8
eCFR. 26 CFR 1.1273-1 – Definition of OID
9
Internal Revenue Service. Publication 1212 (12/2025), Guide to Original Issue Discount (OID) Instruments – Section: Figuring OID on Stripped Bonds and Coupons
10
eCFR. 26 CFR 1.1272-1 – Current Inclusion of OID in Income
11
Office of the Law Revision Counsel. 26 U.S.C. 6049 – Returns Regarding Payments of Interest
12
Internal Revenue Service. General Instructions for Certain Information Returns (2025)
13
Internal Revenue Service. Instructions for Schedule B (Form 1040) (2025)
14
Internal Revenue Service. Accuracy-Related Penalty