The accrued OID is added to the basis of the bond or coupon. The accrued OID is the amount that produces a YTM, based on your purchase date and purchase price, equal to the lower of the following rates. The coupon rate on the bond before the separation of coupons. However, if you can establish the YTM of the bond with all coupons attached at the time of its original issue, you can use that YTM instead.
Increase your basis in the stripped tax-exempt bond or coupon by the interest that accrued but was neither paid nor previously reflected in your basis before the date you sold the bond or coupon. Part of the OID on bonds or coupons acquired after this date may be taxable. Figure the taxable part in three steps. Use the YTM based on the date you obtained the stripped bond or coupon. Find the issue price that would produce a YTM as of the purchase date equal to the lower of the following rates.
The coupon rate on the bond from which the coupons were separated. However, you can use the original YTM instead. The YTM based on the purchase date and purchase price of the stripped coupon or bond.
Subtract this issue price from the stated redemption price of the bond at maturity or, in the case of a coupon, the amount payable on the due date of the coupon. None of the OID on your stripped tax-exempt bond or coupon is taxable if you bought it from a person who held it for sale on June 10, , in the ordinary course of that person's trade or business. Increase the basis of your stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. If you own a tax-exempt bond from which one or more coupons have been stripped, increase your basis in it by the sum of the interest accrued but not paid before you dispose of it and not previously reflected in basis and any accrued market discount to the extent not previously included in your income.
If you purchased a stripped bond or coupon after July 1, , and before , and you held that debt instrument as a capital asset during any part of a calendar year, you must figure the OID to be included in income using a constant yield method. Under this method, OID is allocated over the time you hold the debt instrument by adjusting the acquisition price for each accrual period.
The OID for the accrual period is figured by multiplying the adjusted acquisition price at the beginning of the period by the YTM.
The adjusted acquisition price of a stripped bond or coupon at the beginning of the first accrual period is its purchase or acquisition price.
The adjusted acquisition price at the beginning of any subsequent accrual period is the sum of the acquisition price and all of the OID includible in income before that accrual period.
An accrual period for any stripped bond or coupon acquired before is each year period beginning on the date of the purchase of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. In general, the YTM of a stripped bond or coupon is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the acquisition price of the debt instrument or coupon.
If you purchased a stripped bond or coupon after July 1, , but before , and the period from your purchase date to the day the debt instrument matures can be divided exactly into full 1-year periods without including a shorter period, then the YTM can be figured by applying the following formula. This calculation can only be used if the period from purchase to maturity can be divided exactly into full accrual periods. To calculate: s. Please click here for the text description of the image.
If the debt instrument is a stripped coupon, the stated redemption price is the amount payable on the due date of the coupon. If the period between your purchase date and the maturity date or due date of the debt instrument does not divide into an exact number of full 1-year periods, so that a period shorter than 1 year must be included, consult your broker or your tax advisor for information about figuring the YTM.
You figure the amount to include in income by adding the daily OID amounts for each day you hold the debt instrument during the year. If your tax year includes parts of more than one accrual period which will be the case unless the accrual period coincides with your tax year , you must include the proper daily OID amounts for each of the two accrual periods.
The daily OID for the initial accrual period is figured by applying the following formula. The daily OID for subsequent accrual periods is figured in the same way, except the adjusted acquisition price at the beginning of each period is used in the formula instead of the acquisition price. If you purchased a stripped bond or coupon other than a stripped inflation-indexed debt instrument after , and you held that debt instrument during any part of a calendar year, you must figure the OID to be included in income using a constant yield method.
The OID for the accrual period is figured by multiplying the adjusted acquisition price at the beginning of the period by a fraction. If the stripped bond or coupon is an inflation-indexed instrument, you must figure the OID to be included in income using the discount bond method described in Regulations section 1.
For a stripped bond or coupon acquired after and before April 4, , an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the stripped bond or payment date of a stripped coupon or the date 6 months before that date. For example, a stripped bond that has a maturity date or a stripped coupon that has a payment date of March 31 has accrual periods that end on September 30 and March 31 of each calendar year. For a stripped bond or coupon acquired after April 3, , accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period.
In general, the YTM of a stripped bond or coupon is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the acquisition price. How you figure the YTM for a stripped debt instrument or coupon purchased after depends on whether you have equal accrual periods or a short initial accrual period.
If the period from the date you purchased a stripped bond or coupon to the maturity date can be divided evenly into full accrual periods without including a shorter period, you can figure the YTM by using the following formula.
Summary: This is the calculation used for figuring the yield to maturity of bonds and coupons purchased after To calculate: n multiplied by s. On May 15 of Year 1, you bought a coupon stripped from a U. There are exactly 25 6-month periods between the purchase date, May 15 of Year 1, and the coupon's due date, November 14 of Year The YTM on this stripped coupon is figured as follows.
Summary: This is the calculation used for figuring the yield to maturity of bonds and coupons purchased after as described in example Use 7. If the period from the date you purchased a stripped bond or coupon to the date of its maturity cannot be divided evenly into accrual periods, so that a shorter period must be included, you can figure the YTM by using the following formula the exact method.
This calculation can only be used if the period from purchase to maturity has a short initial accrual period. On May 30 of Year 1, you bought a coupon stripped from a U. You decide to figure OID using 6-month accrual periods. There are 12 full 6-month accrual periods and a day short initial accrual period from the purchase date to the coupon's due date. Use 8. You must include in income the sum of the daily OID amounts for each day you hold the debt instrument during the year.
Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. For the initial accrual period of a stripped bond or coupon acquired after , figure the daily OID using Formula 1 , later, if there are equal accrual periods. Use Formula 2 , later, if there is a short initial accrual period.
For subsequent accrual periods, figure the daily OID using Formula 1 whether or not there was a short initial accrual period , but use the adjusted acquisition price in the formula instead of the acquisition price. Assume the same facts as in Example 12 and that you held the coupon for the rest of Year 1. For the short initial accrual period from May 30 through August 11, the daily OID is figured using Formula 2 , as follows. The daily OID is figured using Formula 1 , as follows. The OID for the final accrual period for a stripped bond or coupon is the amount payable at maturity of the stripped bond or interest payable on the stripped coupon minus the adjusted acquisition price at the beginning of the final accrual period.
The daily OID for the final accrual period is figured by dividing the OID for the period by the number of days in the period. If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.
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Services are offered for free or a small fee. To find a clinic near you, visit IRS. Comments and suggestions. Tax questions. Getting tax forms, instructions, and publications. Ordering tax forms, instructions, and publications. Accrual period. Acquisition premium. Adjusted issue price. Debt instrument. Issue price. Market discount. Qualified stated interest. Stated redemption price at maturity. Yield to maturity YTM.
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Contingent Payment Debt Instruments Noncontingent bond method. Comparable yield. Projected payment schedule. Steps for figuring OID. Net positive adjustment. Net negative adjustment. Basis adjustments. Treatment of gain or loss on sale or exchange. Premium, acquisition premium, and market discount.
Inflation-Indexed Debt Instruments Inflation-adjusted principal amount. Index ratio. Debt instrument held at the end of the tax year. Debt instrument sold or retired during the tax year. Stated interest. Deflation adjustments. For bonds issued after , the OID is treated as interest. You also get to increase your basis in the bond by the amount of OID included in income. This reduces your capital gain — or increases your loss — when you sell it.
The bond issuer will send you a Form OID. This form shows the amount of OID Box 1 to include in your income. If you disposed of the obligation or acquired it from another holder during the year, you have special filing instructions and your interest may be exempt from tax. If you forfeited interest or principal by withdrawing the money before the maturity date of the obligation, you may deduct this amount to figure your adjusted gross income on your income tax return.
The information on your form may be different for covered and noncovered securities. You may also have special filing requirements if you held real estate mortgage investment conduit REMIC regular interests and collateralized debt obligation CDO interests.
Yes, holders can file electronically. To do so, the holder must have software that generates a file according to the specifications in IRS Pub. There are five copies of the OID. Copy B and Copy 2 are sent to you. Copy 2 is to be filed with your state tax return if required.
The holder retains Copy C. You should receive Form OID in the mail. You do not need to submit it when you file your tax return, but you should hold onto it for your records. The OID is an important form when you report special kinds of interest and investment income on your tax return. The form gives you specific information that you need to report correctly and in the right tax categories. If you have questions—and these issues are complicated—work with a tax preparer or expert.
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