If you need to enter an exempt amount for your Form 1099-OID Original Issue Discount:
When you print your return, you will see the full amount on Line 1 of Federal Schedule B (Form 1040) Interest and Ordinary Dividends and also the OID Adjustment amount which will be subtracted from the total interest listed, basically exempting it out.
You may wish to consult with your broker to verify if this needs to be reported as the IRS Publications (see below) state that the OID on tax exempt bonds should be added back to the basis to figure if there is any gains or losses on the sale. If this is already done, the amount may not even need to be reported, but this must be determined based on each taxpayer's situation.
Per IRS Publication 1212 Guide to Original Issue Discount (OID) Instruments, on page 6:
Sale, exchange, or redemption. Generally, you treat your gain or loss from the sale, exchange, or redemption of an OID debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040 or 1040-SR).
Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Your basis, generally, is your cost increased by the OID you have included in income each year you held it. In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. For a covered security, your broker will report the adjusted basis of the debt instrument to you on Form 1099-B.
See chapter 4 of Pub. 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments.
Per IRS Publication 550 Investment Income and Expenses (Including Capital Gains and Losses), on page 11:
Original issue discount. Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest.
For information on the treatment of OID when you dispose of a tax-exempt bond, see Tax-exempt state and local government bonds, later.
Original Issue Discount (OID) (on page 13):
OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.
A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.
All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments.
The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). See Discount on Short-Term Obligations, later.
For information about the sale of a debt instrument with OID, see Original issue discount (OID) on debt instruments, later.
Discounted Debt Instruments (on page 49):
Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.
Tax-exempt state and local government bonds. If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID.
If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. For more information on the basis of these bonds, see Discounted tax-exempt obligations, earlier in this chapter.
Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain from market discount is ordinary income.
You figure market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see Market Discount Bonds in chapter 1.
A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.
See IRS Instructions for Forms 1099-INT and 1099-OID Interest Income and Original Issue Discount for additional information.
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