Accrued Interest Paid on Purchases

My 2007 Tax Reporting Statement from Fidelity reports this on bonds purchased. It also adjusts the cost basis for the accrued interest on bonds I have sold. Do I just ignore the accrued interest, since Fidelity keeps track of it?

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Accrued interest paid on bonds purchased gets deducted from interest income on the bonds. Likewise, accrued interest received on bonds sold gets added to the interest income on the bonds.
The brokerage firm keeping track of the info should be helpful in preparing your tax returns. You should give this info to your CPA/tax professional.
It is not to be ignored.
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Correct, but one more question. Does the accrued interest also affect the cost basis and proceeds for capital gain purposes? Say you bought bonds for $10,200 of which $200 was for accrued interest, and you sell the bonds for $11,400 of which $300 is for accrued interest. Then for capital gains, the profit is (11400-300)-(10200-200)00. As long as Fidelity subtracts the accrued interest from both the cost and the sale, it should be OK. Is this right?

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No, the accrued interest is not capitalized into the bond cost.
So the accrued interest is not part of the basis.

On Feb 15, 7:02 pm, snipped-for-privacy@panix.com (Arthur Kamlet) wrote:
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This doesn't make sense. When I buy a bond at my brokerage, it says for example
Face Value = 10,000 Trade Type = Principal Issue = T Note Coupon = 4.875 Maturity = 08/31/2008 Qty = 10 Price = 101.76562500 Principal = $10,176.56 Accrued Int = $231.70 (173 days) Trans Fee = 0 Net Money = $10,408.26
So what I pay for the bond is $10,408.26.
But the principal is $10,176.56, and I believe this is what should be used in the capital gain calculation when you sell the bond.
The interest of $231.70 gets subtracted out of my net interest for the year. At 4.875% I should get $487.5 a year, so my interest repoted on Schedule B will be either 487.50-231.70%5.8, or 487.50 on one line and (231.70) on the next line.

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You are mixing cost basis of the bond, with paid and accrued interest.
You will reduce your bond's interest income by the accrued interest you paid. But you will not use either interest received or accrued interest paid to change your cost basis.

On Feb 17, 5:48 pm, snipped-for-privacy@panix.com (Arthur Kamlet) wrote:
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But the cost basis of the bond is the principal, right? The amount you pay from your account to actually buy the bond is the principal plus accrued interest. I guess this is what an end user means when they say I paid X for the bond (X dollars went out of my account and I got N bonds in return), but that X dollars was for bonds and interest.