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I received a 1099-OID form from my broker for the first time and don’t know where to enter the data in my taxes. The form has a value of 1.89 in box 1, and nothing else. This data is for a total of 4 bonds (of the same CUSIP: 20341WAD7) I bought on Oct31 (2) and Nov20 (2) of 2019. The bond did not pay any interest in 2019. I bought the bond at a discount to par, at about 83 cents on the dollar, if it matters.

What I don’t understand is why I’m getting an OID form when this isn’t a zero coupon bond and to my knowledge wasn’t issued at a discount. I searched the IRS 2019 OID tables for 20341WAD7 and that CUSIP didn’t show up. What I’d like to know is where to enter or what to do with the 1.89 value on my taxes? I think I read somewhere that you add it to interest income but...

  1. Shouldn’t my broker have done that already on my 1099-INT?
  2. I don’t want to change the values from what my 1099-INT reports or do anything that could cause the IRS to flag my return.

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Aside: I assume you mean these bonds didn't pay you any interest during the period you held them in 2019. If they're not zeros, they generally must make at least one interest payment sometime in each calendar year. It appears these bonds pay semiannually on 4/15 and 10/15, which were prior to your purchase dates.

The terminology here is a bit confusing. There are two similar and related but distinct things:

  • if a bond is issued at a 'non-minimal' discount from par, the profit you make by buying at a discount and redeeming at par is considered for tax purposes to be (additional) interest, and subject to tax each year during the term even though you don't actually receive it until redemption (or sale). This is called Original Issue Discount or OID. For a zero-coupon bond there will always be OID, at least during normal economic times (i.e. not now=COVID when essentially all central banks and most governments are dumping all the money they can as fast as the metaphorical helicopters can take off). But even for a bond with a coupon, if the coupon rate is below what the market considers appropriate buyers the issuer will be forced to sell at less than par, so there will be OID which is treated for tax purposes as added to the coupon each year.

  • if a bond is purchased later (in the secondary market) at a 'non-minimal' discount from par -- and your 17% is not minimal -- that is called Market Discount or sometimes Acquisition Discount. To the extent this discount is due to OID, you must treat it as above. To the extent this discount is not due to OID, but due to market changes including downgrades in the evaluation of credit risk, you have the option to report and pay tax on it each year in the same manner as OID, above, or to wait until redemption or sale (i.e. until you actually receive the profit) but then the reporting is more complicated.

See this rather long section of pub 550 (also available in PDF, which I prefer; use the nav link at the top of the page to go up one level).

In your case this bond doesn't appear to be issued at a discount, but you did buy at a significant discount. Pub 1212 lists only OID, which is already over a hundred pages, and doesn't even try to list secondary market sales. It's possible the broker made a mistake in using box 1 instead of box 5 on 1099-OID, and may even not have actually let you make the election or not clearly. But for the small amounts involved here I wouldn't spend time worrying about it. Just report the broker's computed amount as interest per How to report interest income / form 1099-OID and add it to your basis (the broker's system should automatically do this for you); when you redeem or sell you'll get credit for the previously-taxed portion and it will all more-or-less even out. (Or if the company defaults, you'll recognize a slightly greater loss.)

So why are both kinds of discounts reported, as (effective) interest, on a form labelled OID, but not on a form labelled INT? G-d knows, and possibly someone in the Office of Tax Policy, but probably nobody else. You can drive yourself nuts trying to make sense out of some of the things IRS does.

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  • Thanks for your detailed answer which I'm still reviewing. Today I went on my online Tax software and they had an e-form for 1099-OID and so I entered the '1.89' in the field for box 1, and not surprisingly, my total refund/owed result at the top of the screen didn't change at all. Normally I just enter whatever my brokers send me as I don't want to flag myself with the IRS, but in this case entering that '1.89' value for $4000 worth of bonds felt like I was clearly doing something wrong. May 6, 2020 at 18:37

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