What should be reported as interest income when a bond is sold before its maturity?

When a bond is sold before its maturity, the interest income that should be reported includes the interest accrued since the last interest payment up until the sale date. This accrued interest represents the pro-rata portion of the bond’s interest that has accumulated during the period the seller held the bond after the last payment.

This is important because bondholders are entitled to receive the interest that their investment has earned, even if they decide to sell the bond before it reaches maturity. The payment of accrued interest is typically settled at the time of the sale; the buyer of the bond compensates the seller for the interest that has accrued since the last payment date.

In this situation, only the interest payments received prior to the sale, total face value, or lack of reporting interest if sold at a loss do not accurately reflect the income from holding the bond. These options omit the critical concept of accrued interest, which adequately represents the income earned up to the point of the sale. Thus, acknowledging interest accrued at the selling point aligns with proper reporting practices for interest income in tax scenarios involving bonds.