J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

4.22 Stripped Coupon Bonds and Stock

Brokers holding coupon bonds may separate or strip the coupons from the bonds and sell the bonds or coupons to investors. Examples include zero-coupon instruments sold by brokerage houses that are backed by U.S. Treasury bonds (such as CATS and TIGRS).

The U.S. Treasury also offers its version of zero coupon instruments, with the name STRIPS, which are available from brokers and banks.

Brokers holding preferred stock may strip the dividend rights from the stock and sell the stripped stock to investors.

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Caution

Recomputing Form 1099-OID Amount

Do not report the amount shown in Box 1 of Form 1099-OID for a stripped bond or coupon; that amount must be recomputed under complicated rules described in IRS Publication 1212. See 4.19 for reporting the recomputed OID on your return.

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If you buy a stripped bond or coupon, the spread between the cost of the bond or coupon and its higher face amount is treated as original issue discount (OID). This means that you annually report a part of the spread as interest income. For a stripped bond, the amount of the original issue discount is the difference between the stated redemption price of the bond at maturity and the cost of the bond. For a stripped coupon, the amount of the discount is the difference between the amount payable on the due date of the coupon and ...