I bond interest: interest income or long term capital gains?

[KayJayToo]

Sold I bonds in 2024 that I had purchased in 2020.  I did not take the interest annually, so I realized $500 of interest when I sold.

Got at 1099-INT from Treasury Direct.  Should this be included as Interest Income when I file or should it be long term capital gains?  If the latter, don't I need a Form 8949?  I don't see that as an option in my Treasury Direct account.

Your help is MUCH appreciated, so thanks in advance.  My first year of dealing with an I bond sale.

[DianeW777]

Yes, the $500 is interest income earned from the time your bought the bond.  However the cost basis is also increase by $500 so the selling price and purchase price should create a little to no gain on the sale.

• Where do I enter 1099-INT?

The sale will also be recorded in 2024. Follow the steps below to report this sale. To enter your sale in TurboTax, follow these steps. Click this link for more information. Where do I enter Investment Sales?

1. Open or continue your return.
2. Navigate to the investment sales section:
   • TurboTax Online/Mobile: Go to investment sales. If using this application, make sure it is open
   • TurboTax Desktop: Search for investment sales and then select the Jump to link. 
     • Or Personal Tab > Continue > I'll choose what I work on > Scroll to Investment Income > Select Stocks, Cryptocurrency, Mutual Funds, Bonds, Other
3. Answer Yes to the question Did you sell any of these investments in 2024? (or Okay! to Time to kickoff your investments!).
   • If you land on  the Investment sales summary or Your investments and savings screen, select Add More Sales or Add investments.

[KayJayToo]

Thanks for your reply but it does not, I believe answer my basic question.  Let me rephrase:  if I sell an I bond that I have held for more than a year, do I consider the accrued interest a long-term capital gain (taxed at 15%) or interest income (taxed at my regular income bracket)?  Thanks

Also, you wrote "However the cost basis is also increase by $500 so the selling price and purchase price should create a little to no gain on the sale."  I have no idea what you mean by the cost basis increasing by $500 as well.  The cost basis should not change.

[DianeW777]

The interest will always be interest income and is taxed at your ordinary tax rate - no capital gain treatment.  

In your case it will be reported when cashed because you chose not to include the accrued amount each year (very common). 

Because of interest income being taxed, it is also considered as an addition to the cost basis when you sell the bond to eliminate double taxation on the same money.

@KayJayToo