Page 26 - Interest Income - Individuals Handbook

Bonds traded flat

Interest on bond

Bond

 If you buy a bond at a discount
when interest has been defaulted
or when the interest has accrued
but hasn't been paid, the
transaction is described as
trading a bond flat.
 The defaulted or unpaid interest
isn't income and isn't taxable as
interest if paid later.
 When you receive a payment of
that interest, it is a return of
capital that reduces the
remaining cost basis of your
bond. Interest that accrues after
the date of purchase, however, is
taxable interest income for the
year it is received or accrued.
 See Bonds Sold Between Interest
24
Dates, later, for more information