Page 86 - Interest Income - Individuals Handbook

When to report interest income

Example

Cash Method  On September 1, 2018, you loaned
another individual $2,000 at 4%
 Most individual taxpayers use interest, compounded annually.
the cash method.  You aren't in the business of lending
 If you use this method, you money.
generally report your interest  The note stated that principal and
income in the year in which interest would be due on August 31,
you actually or constructively 2020. In 2020, you received
receive it. $2,163.20 ($2,000 principal and
 However, there are special $163.20 interest).
rules for reporting the discount  If you use the cash method, you
on certain debt instruments. must include in income on your 2020
 See U.S. Savings Bonds and return the $163.20 interest you
Original Issue Discount (OID), received in that year.
earlier.