How does an original issue discount work?

An original issue discount is the difference between the face value of a bond and the price at which it was originally sold to an investor by the issuer. When the bond is eventually redeemed on its maturity date, this discount is paid to the investor, which represents a profit for the investor.

What is an original issue discount bond?

Original issue discount bonds (OID bonds) are commonly thought of as bonds that, when originally issued, were sold at a price less than their par amount, with the difference being the amount of original issue discount (OID).

What is original issue discount loan?

Original Issue Discount (OID) is a type of interest that is not payable as it accrues. OID is normally created when a debt, usually a bond, is issued at a discount. In effect, selling a bond at a discount converts stated principal into a return on investment, or interest.

How do I report original issue discount on tax return?

Report interest that is taxable OID in box 1 or 8 of Form 1099-OID, Original Issue Discount, not on Form 1099-INT. Report interest that is tax-exempt OID in box 11 of Form 1099-OID, not on Form 1099-INT.

What is original issue discount in promissory note?

A debt instrument (bond, note, loan) is issued with original issue discount (OID) when, among other things, the instrument is issued (generally, the amount actually loaned) for less than the face amount of the instrument (technically, the redemption amount). There are some strategic reasons to issue a note this way.

How do you report original issue discount on tax return?

Original issue discount (OID) is reported on Form 1099-OID. Although you may not have received a cash payment from the obligation during the year, if the obligation was originally issued at a discount, IBKR is required to report a portion of that OID each year it is held in your account.

Is original issue discount on US Treasury obligations taxable?

Box 1 Original Discount Amount (OID) is taxable interest. OID accrues over the life of the underlying bond irrespective of the receipt of any payments from the issuer during that time.

How is an original issue discount bond is different from a zero-coupon bond?

The difference between a regular bond and a zero-coupon bond is the payment of interest, otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments.

Do I have to report tax-exempt OID?

Box 11 Tax-exempt OID is generally reported as tax-exempt interest on Form 1040. However, part of the OID on a stripped tax-exempt bond, or a stripped coupon from such a bond, acquired after June 10, 1987 could be taxable. Enter the state abbreviation, the state ID number if provided, and the amount of tax withheld.