What Is Original Issue Discount (OID)?

Original issue discount (OID) is the difference between a bond's stated redemption price at maturity (its face value) and the price you paid when it was issued below full value. Although you won't receive the OID as cash until the bond matures, the IRS requires you to report a portion of it as taxable interest income each year you hold the bond — making it a form of phantom income. You'll receive a Form 1099-OID each year showing the amount you must include in income, which also increases your cost basis in the bond over time. Zero-coupon bonds are the most common example: they're sold at a deep discount, pay no periodic interest, and mature at full face value, but you owe taxes on the accruing OID each year. Holding OID bonds in a tax-deferred retirement account is often more efficient, since the annual phantom income doesn't trigger a tax bill inside those accounts.