Discount from Par Value at the time a bond or other debt instrument, such as a Strip is issued. (Although the par value of bonds is normally $1,000, $100 is used when traders quote prices.) A bond may be issued at $50 ($500) per bond instead of $100 ($1000), for example. The bond will mature at $100 (1,000), however, so that an investor has a built-in gain if the bond is held until maturity. The most extreme version of an original issue discount is a Zero-Coupon Bond, which is originally sold at far below par value and pays no interest until it matures. The Revenue Reconciliation Act of 1993 extended OID rules to include stripped preferred stock.
The tax treatment of original issue discount bonds is complex. The Internal Revenue Service assumes a certain rate of appreciation of the bond every year until maturity. No capital gain or loss will be incurred if the bond is sold for that estimated amount. But if the bond is sold for more than the assumed amount, a Capital Gains Tax or a tax at the Ordinary Income rate is due.
Savings Bonds are exempt from OID rules.
