hybrid security - looks like a bond - acts like a stock -

[investor]

Hi Mark - I have a bond that paid accrued interest at purchase but reported the earnings as qualified dividends for tax purposes. Issuer advises that accruals should be added to the cost basis at purchase and deducted at sale. What's the best way to post this on fund manager.

Thank you.

Chris

[Mark]

Hi Chris,

You received an accrued interest payment when you bought the bond? I would normally expect you to pay accrued interest when you buy a bond? Can you elaborate on what happened?

Ways to affect your tax cost basis include:

- Purchase price
- Account Fee or Return of Capital distribution types. Account fees are negative valued distributions of the type "Account Fee", and increase your cost basis. Return of Capital distributions lower your cost basis.

[investor]

Sorry I did not make that clearer. I paid accrued interest at purchase in July 2008. In October 2008 I received interest which was then classified on the 1099 as a dividend.

Thanks

Chris

[Mark]

Hi Chris,

Thanks for the clarification. Since you want this accrued interest to be added to the cost basis at purchase I would suggest including the paid accrued interest in your initial purchase amount. This way, it will increase your cost basis, so when you sell the bond, your gain will be reduced by the amount you paid in accrued interest.