interest- income, or expense?

[Mike or Penny Novack]

Frank H. Ellenberger wrote:

>Am 20.09.2012 20:19, schrieb Anna's unattended mail:
>  
>
>>I'm not sure whether to make the interest account income or expense.
>>Is it generally based on which is expected to be the greater of the
>>two over the long term?
>>    
>>
>
>Eventually you should have 2:
>Expense:Interests for loans you use,
>Income:Capital Gains:Interests for loans you gave.
>
>  
>
Nope.

Although I am loathe to give advice like this (not being an accredited 
tax accountant) this one is so serious somebody has to.

Interest (on loans you give) is NOT capital gains. It is current income. 
It is not capital gains even if you purchase a note (example, a bond) 
discounted well below the face value at maturity because the interest 
rate of this note is below the current market rate. You report that gain 
as INTEREST income which is current income. If you have investments of 
this sort in non tax deferred accounts I strongly suggest you seek the 
advice of a tax accountant.

Michael D Novack

PS --- In case not clear enough I'll give an example. You buy a note 
(make a loan) with a face amount of $1000 and paying interest at 3% (on 
the face amount) for $970 which is about what the price would be if the 
current market rate for such notes is 6% and the note is due in one 
year. You receive $30 in interest and a gain of $30 when the note 
matures but that gain is reported as interest, not a capital gain. The 
reason is that loans aren't always made in terms of explicit interest. 
Might have no interest paid as such, all being contained within the 
discount.