How to Account for Accrued Interest on a Stock Redemption
Redeem your stock by selling it back to the company you purchased it from, if you invest directly with the company. If you hold common stock, the company repurchases it at market value, while it buys preferred stock at the par value stated on the stock certificate. However, most individual investors have brokerage accounts and sell their stock on the open market through a broker instead of redeeming it. Note that stock does not generate interest; it generates dividends and appreciates in price. For tax purposes, the IRS treats dividends and interest the same way, but appreciation is a capital gain and therefore receives different treatment.
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Instructions
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Redeem the stock through the company or its transfer agent or sell through your broker.
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Ask the transfer agent for records of the original purchase if you do not have them already. If you have a broker, request a report on capital gains, which will have the stock's purchase and sale price, as well as a report on account activity, which lists dividends.
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Include any dividends received in the calendar year before redeeming or selling the stock on your tax return as income. The IRS treats interest payments and dividends as income on your tax return. Dividends do not accrue; they pay semiannually or annually instead. Report and pay taxes on dividends every year.
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Deduct the amount you originally paid for the stock and any extra fees from the purchase or sale from the amount you sold it for; the difference is appreciation and you owe taxes on it. If you held the stock for less than a year, you pay the same rate on the profit that you do on income. If you held it for more than a year, the profit qualifies as a long-term capital gain and you pay a reduced rate, which for most people is 15 percent.
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Tips & Warnings
Keep records of the sale for at least 7 years. The IRS investigates most irregularities within 2 years, but has the right to investigate any return it believes may be fraudulent at any time.
