Accrued Interest on Bonds
If a bond is sold between interest payment dates, part of the sales price represents interest accrued to the date of the sale. For the year of the sale, the seller must report part of the sales price as interest income, even if the seller does not receive a Form 1099-INT. The buyer will treat this amount as a return of capital investment, reducing their basis in the bond.
For the year of the sale, the buyer of the bond may receive a 1099-INT reflecting the accrued interest. This amount is taxable to the seller. This topic is complex and is out-of-scope for the VITA/TCE program. Taxpayers who buy or sell bonds between interest payment dates should be referred to a professional tax preparer. If taxpayers would like additional information, refer them to Publication 550, Investment Income and Expenses.
To review information related to the software, go to the Volunteer Resource Guide (Tab 2), Additional Interest, NAEOB, and State Adjustments.