Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31, 2019, she sold the bond for $9,800, which included $200 of accrued interest.

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Theresa has $200 interest income for the portion of the year she held the bond in 2019. She has a $400 loss from the bond because she bought it for $10,400 (including accrued interest) and sold it for $10,000 ($9,800 plus $200 of accrued interest).

Theresa, a Cash Basis Taxpayer, Purchased a Bond on July