Accrued Interest on Corporate Bonds

Question

A hypothetical investor buy a corporate bond on Dec 5, 2020 and pays $1000 dollars of accrued interest. The bond then pays him $1500 dollars of interest on March 1, 2021. I claim that $1000 dollars of accrued interest is deductible on his 2021 income tax return. It is not deductible on his 2020 income tax return. This is true even if he does not itemize. The reason for this is that $1000 of the $1500 he got in March was his own money. Do I have this right?
The investor lives in the United States.

D Stanley · Accepted Answer

Not exactly. In 2021 you would claim $500 of interest income, not a $1,000 deduction in 2020 and $1,500 income in 2021. The accrued interest you pay is not really an "expense" since you get it back at the next coupon payment (or when you sell the bond, whichever comes first).
This is included in the instructions for Schedule B:

Accrued interest.
When you buy bonds between interest payment dates and pay accrued
interest to the seller, this interest is taxable to the seller. If you
received a Form 1099 for interest as a purchaser of a bond with
accrued interest, follow the rules earlier under Nominees to see how
to report the accrued interest. But identify the amount to be
subtracted as "Accrued Interest."

Accrued Interest on Corporate Bonds

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