From IRS Publication 550: Bonds Sold Between Interest DatesIf you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. See Accrued interest on bonds under How To Report Interest Income, later in this chapter, for information on reporting the payment. http://www.irs.gov/publications/p550/ch01.html#en_US_2013_pu...I think the question is when you got the actual payment that included the "reimbursement" of the $86.84 in accrued interest you paid. If that was in 2012, then Pub 550 says you should treat it as a return of capital rather than taxable interest in 2012. But if you bought the bond say 12/1/2012 and the first interest payment wasn't until 1/31/2013, then it probably goes in 2013.Please insert usual disclaimers about this not being official tax advice and the like. Publication 550 has more stuff on this.good luck,dan
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