A municipal bond issued below face value accretes original issue discount tax-free each year, simply raising the bond’s basis with no cash received and no market discount tax trap.
How it works
Face value minus the original issue price gives the total OID; dividing that by years to maturity gives a straight-line annual accretion estimate, tax-free for a tax-exempt municipal bond.
What this does not include
This does not include the IRS’s actual constant-yield accretion method, which the tax code requires and which accretes a smaller amount in early years and progressively more as the bond nears maturity — this straight-line version is a simplified approximation.
How to use this calculator
- Enter face value, original issue price, and years to maturity.
Frequently asked questions
Why is original-issue OID treated differently from a secondary-market discount?
Original issue discount reflects the market’s assessment of fair value at the time of issuance, while a secondary-market discount can reflect changing interest rates or credit conditions after issuance — the tax code treats them under separate rules.
Do I owe tax on OID accretion even though I don’t receive cash?
For a tax-exempt municipal bond, no — the accretion is tax-free; it’s tracked mainly to correctly increase the bond’s basis for eventual sale or maturity.
What if I buy an OID municipal bond in the secondary market instead of at issuance?
Different rules apply — that’s a secondary-market purchase, governed by the market discount and de minimis rules covered separately on this site’s municipal-bond-de-minimis-rule calculator.
