After reading the information Scruffy provided, along with text from other websites, I met with a tax advisor who confirmed the following line of reasoning.
By way of background, I am a packrat who retained the original purchase confirmation slips from 1994 along with all of my broker's consolidated 1099s. There are Original Issue Discount (OID) sections on the 1099s, which identify OID on an annual basis dating back to 2007. In 2006 and prior years, the statements merely say "No Reportable OID" or something to that effect. (These were tax free municipal zero coupon bonds and, living in Texas, there was no state income tax).
I am relatively proficient in Microsoft Excel and used an exponential regression equation to model the OID stream of payments, achieving good correlation (to within a few cents per year). That enabled me to extrapolate OID back to 1994, when I purchased the bonds in the aftermarket.
I am a chemist, rather than an accountant. My simplified understanding is that OID is essentially an annual imputed interest which is reinvested back into the bond, much the same as reinvesting distributions from mutual funds. Both increase the basis in the holding and reduce capital gains when the investment is sold, or in the case of my bonds, matures.
After adding the imputed interest (OID) to the basis from the original confirmation slips, I ended up with a slight capital loss. I merely entered the increased basis (original purchase price + sum of annual OID) into TurboTax and everything seems to have worked out properly.
I invite correction of my interpretation, if warranted.
Michael
