Senior Tax Specialist Practice Exam

When selling a bond, the interest income reported is typically determined by the coupon interest received and any additional accrued interest due to the sale timing. In this scenario, Harold should report the amount of interest income based on the bond's stated interest or coupon rate, as well as any accrued interest he may have received up until the date of sale.

If Harold receives $125 in interest income during the period he holds the bond, this amount is directly reportable as interest income. Additionally, if he sells the bond for a price that is higher than his basis in the bond, any gain realized from that sale would typically be classified as capital gain. The specified amount of $50 indicates a short-term capital gain, suggesting that the bond was held for a year or less before the sale.

Thus, Harold is correct to report $125 of interest income and $50 of short-term capital gain, aligning with standard tax principles related to bond transactions. This combination accurately reflects both the income generated from holding the bond and the gain realized upon its sale.