What Is OID, and How Is It Taxed?
Original Issue Discount (OID) is the difference between the principal (or "face value", redeemed at maturity) and the (lower) price at which it was issued. Generally, part of the OID is assumed to be received each year you hold the bond, and is taxed in same manner as interest income on that bond.
Each year, the issuer of the bond (or your broker, if you bought it on the secondary market) will provide you with a Form 1099-OID, reporting the OID it believes is taxable to you that year. This is calculated on the assumption that the discounted price was your acquisition price, and that you held the bond for every day of the tax year.
If you bought or disposed of the bond during the year, or paid a premium over the discount amount in buying the bond, the amount of OID shown on Form 1099-OID will be more than what you actually have
to report. (The same may be true in cases where you have stripped or coupon bond.) In such cases, you should report the Form 1099- OID amount on Schedule B, but then subtract out (as "OID Adjustment") the difference.