Schwab Advisors:  Have you requested that Schwab turn on the Original Issue Discount (OID) section of the 1099?

This can be accomplished by filling out the “Cost Basis Enrollment and Preferences Form” and checking “Adjusted Cost for Fixed Income.”

A client of one of my managers had to pay his CPA do the manual calculations because my manager had not turned this feature on for his Schwab master accounts.  Big client was not happy.

As I understand it, this reporting becomes mandatory in 2014.  Schwab tech support recommended we turn the feature on sooner than later.  (I haven’t contacted other brokers about this issue; I suspect the situation is similar.)

According to the IRS website on OID: “Original issue discount (OID) is a form of interest. It is the excess of a debt instrument’s stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID.” See also the IRS website on Form 1099-OID

This definition from WorldWideWeb Tax  is a bit more clear:

Original issue discount (OID) is a form of taxable interest that must be reported on your tax return. If you have a bond, note, or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity, part of the original issue discount (the amount that it increases in value each tax year towards maturity) must be included in your taxable income as interest on your tax return. You report original issue discount (OID) as it accrues, whether or not you receive any taxable interest payments from the bond issuer.

For more information:

Yet another chapter in the how cost basis is a demanding monster that devours your time.