Original Issue Discount on Bonds

Original issue discount (OID) is a feature of bonds that are purchased for less than their face value. The discount, or the difference between the amount you paid for the bond and its "face value" (face value is the amount you get at maturity) is generally taxed as it is earned each year, even though you won't actually receive it until the bond matures. A zero-coupon bond is an example of a bond with OID. You don't have to report OID from U.S. Savings Bonds, or from bonds with a maturity of one year or less.

Generally, if you are deemed to receive OID you'll receive an information return (Form 1099-OID) from the issuer of the bond, or from the brokerage or other institution holding your bonds.

Save Money Remember that your tax basis in the bond is increased by the amount of OID you report over all the years that you own it, thus reducing the amount of capital gains tax that will be due when you sell the bond.

Income from a bank certificate of deposit, or a similar type of instrument at another institution, that has a maturity longer than one year can also be considered a form of OID, but it's generally reported to you on Form 1099-INT.