Convertible notes (Reg D investment) are almost always converted into shares of the issuing company, including any interest earned. Generally companies that issue convertible notes to raise capital are not in a position to redeem notes with cash. They are simply not in the financial position to do so. Companies treat the interest portion their own way, issuing interest shares in drips and drabs or they wait until the principal part of the note has been converted and then convert the interest amount. There really isn't a set rule, basically CFO's choice.If you are paid in cash your taxable amounts are straightforward. If you exit through a conversion you would need to sell every share converted to truly understand the note's genuine return. And of course you don't know your "basis" or cost basis until the entire note including any and all interest has been converted into stock.Things can get messy when the note requires many conversions and the time require for liquidation is drawn out for many months and for multiple years.The only rule for Convertible notes is that its paper, cash is king. And paper is 19¢ a pound.