What amount should Harold report as interest income and short-term capital gain after selling a bond?

To assess the correct amount Harold should report as interest income and short-term capital gain after selling a bond, it's critical to understand how interest income and capital gains are calculated for bonds.

Interest income from bonds typically includes any coupon payments received. This income is reported in the year it is received. If Harold sold a bond and received interest payments, that amount should be reported as interest income. However, if Harold did not receive any coupon payments or if he sold the bond before receiving any interest that would be reported for the current tax year, then interest income might be zero.

The short-term capital gain arises when the bond is sold for more than its purchase price, with the holding period considered short-term if held for one year or less. If Harold’s sale of the bond resulted in a sale price that was higher than what he paid for it, this difference is recognized as a capital gain.

In this situation, the amount reported as interest income is $375, indicating that Harold likely received substantial interest payments from the bond. The short-term capital gain is $50, showing that when Harold sold the bond, he did so for more than his initial investment, yielding a gain.

This combination of reported income illustrates both sources of income from the bond: the