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Does a Cash Basis Taxpayer include Accrued Interest from a Convertible Note as Income?

  • 1.  Does a Cash Basis Taxpayer include Accrued Interest from a Convertible Note as Income?

    Posted 08-15-2019 03:28 PM
    Hello,

    I have a cash basis taxpayer that has invested in a convertible note that matures December 2025.
    The note states that interest accrues on a daily basis at a rate of 10% per annum compounded annually.

    The principal amount is $20,000
    The accrued interest for 2018 is $7,000
    Total principal and accrued interest as of 12/31/18 $27,000.
    The Pro Forma Common Stock Equivalent as of 12/31/18 is $60,674

    I have read several articles and the1099-OID rules.

    Must a cash basis taxpayer report the accrued interest of $7,000 even when no payment has actually been received or is the accrued interest reported as income when either it has been paid or when the note is converted to stock?

    Thank you,


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    Jennifer Lynch
    Garden City NY
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