Theresa, a cash basis taxpayer, purchased a bond on July 1, 2009, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2012, she sold the bond for $10,300, which included $200 of accrued interest.

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Theresa's basis in the bond is $10,400 ($10,000 purchase price + $400 accrued interest). She received $800 of interest in both 2009 and 2010, and $1,000 of interest on December 31, 2011 ($800 for 2011 and $200 of accrued interest). Therefore, her total interest income is $2,600 ($800 + $800 + $1,000). 
Theresa sold the bond on March 31, 2012, for $10,300, which includes $200 accrued interest. Her total gain on the sale is $100 ($10,300 sale price - $10,400 basis). Therefore, she has $200 of interest income and a $100 gain from the bond in 2012.

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