IRS OID on US Treasury STRIPS

Q

What is IRS (Internal Revenue Service) OID (Original Issue Discount) on US Treasury STRIPS?

✍: FYIcenter.com

A

IRS (Internal Revenue Service) OID (Original Issue Discount) on US Treasury STRIPS refers to the imputed interest that you need to report in your tax return each calendar year while you hold a US Treasury STRIPS.

IRS provides a guide "Publication 1212 (01/2025), Guide to Original Issue Discount (OID) Instruments" to help you figure our OID and report it in your tax return.

Here are the rules for US Treasury STRIPS in the "Debt Instruments and Coupons Purchased After 1984" section in the IRS quide.

1. OID must be allocated over the time you hold the STRIPS by adjusting the acquisition price for each accrual period.

2. The OID for the accrual period is figured by multiplying the adjusted acquisition price at the beginning of the period by a fraction.

3. The numerator of the fraction is the debt instrument's YTM, and the denominator is the number of accrual periods per year.

4. The adjusted acquisition price of a STRIPS 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.

5. Accrual period for a STRIPS is each 6-month period that ends on the day that corresponds to the stated maturity date.

6. Yield to maturity (YTM) of a STRIPS is the discount rate that, when used in figuring the present value of the principal payment (par value), produces an amount equal to the acquisition price.

7. YTM of a STRIPS with equal accrual periods is calculated as follows.

 $YTM = 2 \times ({\frac{srp}{ap}}^{\frac{1}{m}} - 1)$ 
 $srp = stated redemption price at maturity$ 
 $ap = acquisition price$ 
 $m = number of full accrual periods$

8. YTM of a STRIPS with a short initial accrual period is calculated as follows.

 $YTM = 2 \times ({\frac{srp}{ap}}^{\frac{1}{\frac{r}{s} + m}} - 1)$ 
 $r = number of days left in the initial accrual period$ 
 $s = number of days of the full initial accrual period$

9. Daily OID of the initial accrual period is calculated as follows, if it is a full period.

 $Daily OID = \frac{ap \times 0.5 \times YTM}{p}$ 
 $ap = acquisition price$ 
 $YTM = Yield To Maturiy$ 
 $p = number of days in accrual period$

10. Daily OID of the initial accrual period is calculated as follows, if it is a short period.

 $Daily OID = \frac{ap \times ({(1 + 0.5 \times YTM)}^{\frac{r}{s}} - 1)}{r}$ 
 $r = number of days left in the initial accrual period$ 
 $s = number of days of the full initial accrual period$

11. Daily OID of subsequent accrual period is calculated as follows.

 $Daily OID = \frac{aap \times 0.5 \times YTM}{p}$ 
 $aap = adjusted acquisition price$

12. Daily OID of the final accrual period is calculated using the following formula. The reason for not using formula in rule 11 is to eliminate any rounding differences accumulated in the calculation.

 $Daily OID = \frac{srp - aap}{p}$ 
 $srp = stated redemption price at maturity$

13. Yearly OID is the sum of the daily OID amounts for each day you hold the STRIPS during the year. You must include the yearly OID in your year end tax return as interest income.

The IRS quide also provided the following example.

On May 29 of Year 1, you bought a coupon stripped from a U.S. Treasury bond through the Department of the Treasury's STRIPS program for $60,000. $100,000 is payable on the coupon's due date, August 11 of Year 7.

Note that there is a mistake in this example given in the IRS guide. The purchase date (or settlement date) should be May 29, instead of May 30.

You decide to figure OID using 6-month accrual periods. There are 12 full 6-month accrual periods and a 74-day short initial accrual period from the purchase date to the coupon's due date.

The YTM on this stripped coupon is figured using formula given in rule 8, as follows.

 $YTM = 2 \times ({\frac{100000}{60000}}^{\frac{1}{\frac{74}{181} + 12}} - 1)$ 
 $= 2 \times (1.04202534660096058 - 1) = 2 \times (1.04203 - 1) = 0.08406 = 8.406%$ 
 $r = "2025-08-11" - "2025-05-29" = 74$ 
 $s = "2025-08-11" - "2025-02-11" = 181$

Note that the intermediary result of (100000.0/60000)**(1/(74.0/181+12)) = 1.04202534660096058 is rounded to 1.04203. If not rounded, the YTM will be 8.405%, not 8.406%.

 $YTM = 2 \times (1.04202534660096058 - 1) = 0.08405069320192116 = 8.405%$

The daily OID for the short initial accrual period (from May 29 to August 11) is figured using formula given in rule 10, as follows.

 $Daily OID = \frac{60000.0 \times ({(1 + 0.5 \times 0.08406)}^{\frac{74.0}{181}} - 1)}{74.0}$ 
 $Daily OID = \frac{1018.4816339746839}{74.0} = 13.763265323982214 = $13.76327$

The daily OID for the second accrual period (from August 11 to February 11 next year) is figured using formula given in rule 11, as follows.

 $Daily OID = \frac{61018.48 \times 0.5 \times 0.08406}{184.0}$ 
 $Daily OID = \frac{2564.6067144}{74.0} = 13.938079969565218 = $13.93808$ 
 $aap = 60000.0 + 1018.48 = 61018.48$ 
 $p = "2026-02-11" - "2025-08-11" = 184$

The OID for year 2025 is figured as follows.

 $2025 OID = (Daily OID of period 1)*74 + (Daily OID of period 2)*142$ 
 $2025 OID = 13.76327*74 + 13.93808*142 = 1018.48 + 1979.21 = 2997.69$ 
 $r1 = "2025-08-11" - "2025-05-29" = 74$ 
 $r2 = "2026-12-31" - "2025-08-11" = 142$

You can also use our imputed interest, also referred as DOI, calculator to validate the result. Click this link "DOI example of a STRIPS settled on 2025-05-29 with a price of $60.0 and a YTM of 8.406%", you will see imputed interests (DOI) displayed for each calendar year.