Original Issue Discount Security

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Original Issue Discount Security

A bond or other debt instrument that is issued at a price below its face value. For example, a bond with par of $10,000 might be issued to an investor for $7,000. All zero-coupon bonds are original issue discount debt.
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(4) The taxation of original issue discount bonds varies according to the issue date and can be complicated.
A taxpayer determines the amount of original issue discount allocable to an accrual period using steps similar to those for original issue discount bonds that are not inflation-indexed (see Q 7737).
A bondholder's adjusted basis is determined under the rules for original issue discount bonds that are not inflation-indexed (see Q 7737).
Prior to the 1982 tax code changes, original issue discount bonds provided lower interest costs to the issuer as a result of alternative methods of taxing issuer and holder.
Example 1: Original issue discount bonds purchased at an acquisition premium.
For many investors, the major disadvantage of owning corporate zero-coupon bonds and original issue discount bonds stems from a negative cash flow.
For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q 7724 and Q 7737 to Q 7740.
For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q 1103 and Q 1116 to Q 1119.4 In the case of a tax-exempt zero-coupon bond, the original issue discount is apportioned among holders as explained in Q 1117, but not included in income.