My accountant says that if you purchase a bond with accrued interest you

deduct the accrued interest from interest on Schedule B if the interest is

paid in the same year as the purchase. If the interest is paid in the

following year it is ignored. In neither case does it affect the cost

basis.

What I did for my case is subtract the accrued interest in the year I

received the first interest payment. So if I bought a bond on 1/

December/2007, and the bond makes payments in 1/March and 1/September,

and each interest payment is $600, and the accrued interest was $200,

then I on my 2008 return I would write on Schedule B "Interest $600",

and "Accrued Interest -$200", and the total would be $400.

If I took the accrued interest on my 2007 return, then the total

interest on Schedule B would be $-200, which looks kind of odd.

However, I think that is the correct thing to do. If your net income

taxable income on page 2 of the 1040 is negative then I imagine you

have a NOL carryover.

Is that correct?

I would think that you would have to add accrued interest to Schedule B when

you sell a bond if the interest would be paid in the sale year, but that is

just a guess. Is it a correct guess?

No, the effect of accrued interest is to lower your first interest

payment. It's as if instead of paying you 4 months interest, they pay

you the usual 6 months interest, but you paid 2 months interest to the

person you bought the bond from.

If you sell a bond, then it seems the accrued interest you receive

would go on Scheulde B. The capital gain on Schedule D is the sale

price of the bond without the accrued interest added (ie. just the

principal), and the purchase price is the cost of the bond without the

accrued interest added (ie. just the principal).