Form 1099-OID: What It Is and How to Use It

When tax season rolls around, the tax forms you receive paint a detailed picture of your finances during the tax year. If Form 1099-OID found its way into your mailbox this year, it’s important to know what this tax document is and how to use it. Let’s look at why you received this tax form and how to correctly report it on your federal income tax return.

At a glance:

• Form 1099-OID reports a special kind of interest income called original issue discount (OID).
• You’ll receive 1099-OID from a payer if you have reportable OID income (at least $10).
• Make sure to report any OID income on your tax return.

What is IRS Form 1099-OID used for?

Form 1099-OID, or original issue discount, is a tax document used to report a specific kind of interest income, typically from certain bonds, notes, certificates, or debentures (long-term business debt not secured by collateral). You may be familiar with Form 1099-INT, which reports interest income earned on investments. Form 1099-OID also reports interest income, but OID usually occurs when a company issues a bond at a price lower than its redemption value at maturity. The OID is the difference between the issue price of the bond or other debt instrument and the redemption value.

Original issue discount explained

The IRS considers OID as interest income taxable over the life of the bond or debt instrument, meaning you need to report it during tax filing. Instead of waiting until you sell the bond to report the full OID, it is taxable over the life of the bond. Box 1 of Form 1099-OID shows your taxable OID for the year.

To better understand how original issue discount works, let’s look at an example. Say you paid $400 for a bond with a $500 face value. When the bond matures, you receive the full $500 face value of the bond, giving you an OID of $100. However, you’ll capture that $100 as interest income over the life of the bond rather than all at once when you cash in.

Tax Tip: The above applies to bonds and other debt instruments issued after 1984. If the bond in question was issued in 1984 or before, special rules apply. For more information, check out IRS Publication 1212 (page 8).

Example of Form 1099-OID

Here’s an example of what Form 1099-OID looks like:

Form 1099-OID instructions

What information is on Form 1099-OID?

On Form 1099-OID, you’ll find several key pieces of information:

• Recipient’s information: Your name, address, and ITIN, as well as your account number.
• Payer’s information: The name and address of the entity that issued the security.
• Original issue discount: In box 1, you’ll see the amount of OID income that you need to report for the tax year.
• Other periodic interest: Box 2 shows the taxable interest paid to you during the year.
• Early withdrawal penalty: If applicable, you’ll find any penalties incurred from early withdrawal of funds in box 3. For example, certain bonds may require you to forfeit a portion of accrued interest if you cash them out early.
• Federal income tax withheld: If you had tax withheld from your payments, you’ll find that amount in box 4.
• OID on U.S. Treasury obligations: Box 8 shows any taxable interest for federal income tax purposes, but it is generally tax-exempt interest for state and local income taxes.

Be sure to keep Form 1099-OID with your other tax records for safekeeping.

Form 1099-OID special considerations

• Market discount bonds: If you purchased a bond at a market discount, different rules apply, and the OID might need to be adjusted accordingly.
• Tax-exempt bonds: Some municipal bonds might have OID, but the interest may be tax-exempt. However, you must still report the OID for informational purposes.
• Early redemption: If you redeem the security before its maturity date, the OID reported may need to be adjusted based on the terms of the redemption.

FAQs about Form 1099-OID

Why did I receive Form 1099-OID?

If you receive a 1099-OID, it means you have investments in financial instruments that generated at least $10 of reportable OID. Some common reasons for receiving Form 1099-OID include:

1. Holding discounted bonds: If you own bonds that you purchased at a discount to their face value, the OID represents the interest income you accrue over time.
2. Structured notes and certificates of deposit (CDs): Certain structured notes and CDs may also be issued at a discount, and the OID is reported as it accrues.
3. Treasury inflation-protected securities (TIPS): These government securities adjust for inflation and often involve OID.

You may also receive Form 1099-OID if you had any foreign tax withheld or you were subject to backup withholding, even if the amount was less than $10. Due to backup withholding rules, this can happen if you don’t provide the payer with your Social Security number or individual taxpayer identification number (ITIN).

Who is the payer on an OID?

The payer on Form 1099-OID is the issuer of a debt instrument or security that generated OID income. This is typically a financial institution, such as a bank, brokerage, corporation, or government body.

When you receive a Form 1099-OID, you’ll find the payer’s information listed on the form, including their name, address, and taxpayer identification number. The payer is responsible for providing you with the 1099-OID form and also submitting a copy to the IRS, ensuring both you and the IRS are aware of the accrued income from your investments.

Do I need to report OID even if I haven’t sold the security?

Yes, you must report OID annually as it accrues, regardless of whether you have sold the security. The IRS treats OID as interest income and requires you to include it in your taxable income each year.

What happens if I don’t report OID?

Failure to report OID can result in underpayment of taxes, which may lead to penalties and interest charges. The IRS receives a copy of your 1099-OID and will match this information against your tax return. That’s why it’s essential to report it accurately.

How to File Form 1099-OID with TaxAct®

Using Form 1099-OID for your tax filing is fairly straightforward, especially if you e-file with us at TaxAct. Our tax preparation software will walk you through the process step-by-step.

To report your OID income in TaxAct:

1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the top left corner of your screen, then click Federal.
2. Click the Investment Income dropdown, then click Original Issue Discount interest (Form 1099-OID).
3. Click + Add Form 1099-OID to create a new copy of the form, or click Edit to edit an already-created form. (Desktop program: click Review instead of Edit.)
4. Continue with the interview process.

The bottom line

Form 1099-OID is an important tax form that ensures all interest income is properly reported to the IRS. Understanding the details provided on this form and how to incorporate them into your tax return will set you up for success during the tax filing season. For more information about this tax form, visit the IRS website.

This article is for informational purposes only and not legal or financial advice.

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