When you buy a coupon bond between payment dates, the seller has earned interest since the last coupon. The buyer typically pays that accrued interest on top of the quoted bond price, then gets the full next coupon from the issuer. Brokers and Treasury desks often show a clean price (quoted) and a dirty price (clean + accrued) so settlement cash is clear at Fidelity, Schwab, Vanguard, E*TRADE, or TreasuryDirect-linked purchases.
This guide is educational only—not tax advice. Auction mechanics: Treasury auction competitive bid basics. Muni tax flavor: Taxable municipal bond basics and Municipal bonds basics. Starter frame: Investing basics for beginners.
Clean price, dirty price, accrued interest
| Term | Plain meaning |
|---|---|
| Clean price | Quoted bond price without accrued interest |
| Accrued interest | Interest earned from the last coupon date up to (but usually not including) settlement |
| Dirty price (invoice price) | Clean price + accrued interest = what you typically wire at settlement |
| Next coupon | Full periodic payment you (the new holder) generally receive from the issuer |
Day-count conventions (30/360, actual/actual, and others) change the accrued math by market. Corporate, municipal, and Treasury conventions are not identical—read the trade confirmation.
Why buyers care about the tax year
For many taxable bonds in a taxable account, the accrued interest you pay at purchase is often treated as a reduction against the interest income you report when that next coupon arrives (or as interest expense/offset per current Form 1099 and Pub 550 patterns)—so you are not taxed on interest the seller already earned. Brokers frequently show accrued interest paid on year-end statements; match it to the 1099-INT / supplemental pages rather than guessing from the coupon alone.
Filing vocabulary: Filing taxes for beginners. Separately, OID accruals on discounted instruments are a different schedule: OID / Form 1099-OID basics.
Tax-exempt municipal coupons can change whether accrued interest is taxable, tax-exempt, or partially taxable—confirm issue-by-issue rather than copying corporate-bond habits.
Worked example
Sam buys a taxable corporate bond at Schwab:
- Face: $10,000
- Clean price: $99.50 → $9,950
- Accrued interest to settlement: $75
- Dirty / invoice total: $10,025 (plus commissions/fees if any)
Two months later the issuer pays a $200 semiannual coupon into Sam’s account. On the tax worksheet (illustrative), Sam may treat much of that $200 as interest income but offset the $75 accrued interest paid at purchase, so taxable interest tied to that coupon is closer to $125 before other adjustments. Exact boxes follow the broker’s 1099 and IRS instructions for the year—do not hard-code this sketch onto every lot.
If Sam had bought at a Treasury auction instead of the secondary market, accrued conventions and settlement still appear on the confirmation; competitive vs noncompetitive bidding is covered in the auction guide above.
Practical cues
- Read the trade confirmation: clean, accrued, dirty, settlement date, and CUSIP.
- Budget dirty cash, not only the clean quote, so the trade does not bounce.
- In January, find “accrued interest paid” on the broker tax package and line it up with 1099-INT.
- Inside an IRA/401(k), the tax offset story is usually moot—you still need dirty-price cash at settlement.
- Prefer funds/ETFs if you do not want to track per-lot accrued offsets (Investing basics for beginners).
- Callable and variable-rate bonds can complicate accrued estimates near call or reset dates—confirm with the desk.
Checklist
- Know whether your quote is clean or dirty before you approve the ticket.
- Fund the full dirty price plus fees by settlement.
- Save confirmations showing accrued interest paid.
- Match year-end accrued-interest paid lines to Form 1099 interest reporting.
- Separate accrued-interest purchase offsets from OID and premium amortization.
- Ask a CPA/EA when muni taxable/tax-exempt accrued amounts are material.
Educational only. Not tax, legal, or investment advice. Accrued-interest conventions, Form 1099 presentation, and broker defaults change; confirm with current IRS publications, trade confirmations, and a qualified tax professional.