Quote:
Originally Posted by retiredguy123
You pay tax on the interest earned every year, even if it doesn't show up on the statement. The reason is that you have access to the interest if you were to cash it in early, so it is earned income. Most banks will even allow you to withdraw the interest earned without penalty. The early withdrawal penalty only applies to the principal. Another reason is that the IRS says so.
|
rg123 is correct again. Earned income, interest earned which may or may not have been paid out.
So the same goes for zero coupon (zero interest) bonds, where the interest is in the amortization of the price difference between purchase and return of face value at maturity.
The general intuition problem is that your/our tax returns are primarily on a cash basis, but earned income is on a GAAP accounting basis.
