Question about OID - suppose you buy a note for $1 off of Folio, with $2 in remaining principal. The note matures, paying you the $2 principal and $1 of interest.
Assuming we take fees out of the equation, is your OID reported on this note $1 or $2?
My guess: Neither.
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(1) General rule
For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount issued after July 1, 1982, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument.
...
(3) Determination of daily portions
For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument. For purposes of the preceding sentence, the increase in the adjusted issue price for any accrual period shall be an amount equal to the excess (if any) of—
(A) the product of—
(i) the adjusted issue price of the debt instrument at the beginning of such accrual period, and
(ii) the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), over
(B) the sum of the amounts payable as interest on such debt instrument during such accrual period.
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http://www.law.cornell.edu/uscode/text/26/1272