Yes, bonds are generally taxable, but how much you owe and to which government depends on who issued the bond and how you made the money. Interest from a corporate bond is fully taxable as ordinary income at rates from 10% to 37%. Interest from a U.S. Treasury bond is taxed federally but exempt from state and local tax. Interest from most municipal bonds is exempt from federal tax and often from your home state’s tax too. Selling a bond before maturity is a separate event with its own rules.
How Interest Is Taxed Depends on Who Issued the Bond
The federal tax code treats interest from most bonds as ordinary income, taxed at the same marginal rates as your paycheck. Under 26 U.S.C. 61, gross income includes interest from virtually all debt instruments.1Office of the Law Revision Counsel. 26 USC 61 Gross Income Defined For tax year 2026, those marginal rates run from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Your broker or bank reports what you earned on Form 1099-INT, which is filed for anyone who received at least $10 in interest from a single payer during the year.3Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Interest is taxable in the year it is paid or credited to your account. Reinvesting it does not delay the tax.
From there, the issuer type changes the picture.
Corporate Bonds: Fully Taxable
A corporate bond has no special exemption. Because a private company issues it, interest is taxable at the federal, state, and local level as ordinary income.4Internal Revenue Service. Topic No. 403, Interest Received Corporate bonds tend to pay higher stated yields than government or municipal bonds partly to make up for that full tax exposure.
One common move is asset location. If you hold both a taxable brokerage account and an IRA or 401(k), holding corporate bonds inside the tax-advantaged account defers the tax on interest until you take distributions.
Treasury Bonds: Federal Tax Only
Interest from federal government debt, including Treasury bills, notes, bonds, and Series EE or I savings bonds, is subject to federal income tax but exempt from state and local income taxes. The exemption comes from 31 U.S.C. 3124, which bars state and local governments from taxing obligations of the United States.5Office of the Law Revision Counsel. 31 USC 3124 Exemption From Taxation In a high-tax state, that matters. A Treasury paying the same coupon as a bank CD or corporate bond will leave more in your pocket after taxes.
You still report Treasury interest on your federal return. On your state return, you subtract it out.6TreasuryDirect. Tax Information for EE and I Bonds Your 1099-INT separates Treasury interest from other interest so you can make the adjustment.
Municipal Bonds: Usually Federal Tax-Free
State and local governments issue municipal bonds to fund things like roads, schools, and water systems. Under 26 U.S.C. 103, interest from these bonds is excluded from federal gross income.7Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds For an investor in a high bracket, the after-tax yield on a muni can beat a taxable bond with a higher stated coupon.
Most states also exempt interest on bonds issued within their own borders from state income tax. Buy a bond from your home state and you often pay no federal, state, or local income tax on the interest. Buy an out-of-state muni and the interest is usually taxable by your home state, even though it stays federally exempt.
Two carve-outs pull some munis back into the tax net. Interest on most private activity bonds issued after August 7, 1986, is a tax preference item for the Alternative Minimum Tax under 26 U.S.C. 57.8Office of the Law Revision Counsel. 26 US Code 57 – Items of Tax Preference These bonds fund projects that mainly benefit private entities, such as a privately operated stadium or industrial facility. If you owe AMT, the interest gets added back into the calculation. Bonds issued by 501(c)(3) organizations such as nonprofit hospitals and universities, along with certain qualified housing bonds, are excluded from that AMT treatment and stay fully exempt.
Selling a Bond Before Maturity
Selling a bond for more than you paid produces a capital gain, taxed separately from interest income. The rate turns on how long you held it. Held more than a year, the gain is long-term and taxed at 0%, 15%, or 20%.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses Held a year or less, it is short-term and taxed at your ordinary income rate.
For 2026, a single filer pays 0% on long-term gains up to $49,450 of taxable income, 15% between $49,451 and $545,500, and 20% above $545,500. Married couples filing jointly pay 0% up to $98,900, 15% up to $613,700, and 20% above that.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Bond sales get reported on Schedule D of Form 1040.10Internal Revenue Service. Schedule D (Form 1040) Capital Gains and Losses
One wrinkle catches people who buy bonds cheap on the secondary market. When you buy a bond for less than its face value, the difference is market discount. Under 26 U.S.C. 1276, the portion of your gain that reflects that accrued discount is taxed as ordinary income, not as a capital gain, when you sell or hold to maturity.11Office of the Law Revision Counsel. 26 US Code 1276 – Disposition Gain Representing Accrued Market Discount Treated as Ordinary Income Ordinary rates usually run higher than long-term capital gains rates, so this can noticeably change your tax bill. A very small discount is ignored under a de minimis rule in 26 U.S.C. 1278.12Office of the Law Revision Counsel. 26 US Code 1278 – Definitions and Special Rules
Zero-Coupon Bonds and TIPS Can Trigger Tax Before You See Cash
Zero-coupon bonds are sold well below face value and pay no periodic interest. You collect the full face value at maturity, and the growth in between is your return. Under 26 U.S.C. 1272, you owe federal income tax on a portion of that built-in gain each year, even though no cash has hit your account.13Office of the Law Revision Counsel. 26 USC 1272 Current Inclusion in Income of Original Issue Discount The IRS calls this original issue discount, or OID.
Your broker calculates each year’s accrual using a constant-yield formula and reports it on Form 1099-OID. Box 1 covers taxable OID; Box 8 covers Treasury OID, which remains exempt from state and local tax.14Internal Revenue Service. Form 1099-OID Original Issue Discount The amount goes on your federal return as interest income for that year.
Treasury Inflation-Protected Securities work the same way. Each year’s inflation adjustment to the principal is reported as OID and taxed as ordinary income, even though the cash arrives only when the bond matures or is sold. This is often called phantom income, and it is a common reason to hold zero-coupon bonds and TIPS inside a tax-deferred retirement account.
The 3.8% Net Investment Income Tax
Higher-income investors owe an extra 3.8% on top of the regular tax. The Net Investment Income Tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a threshold:15Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
Taxable bond interest, capital gains from bond sales, and OID from zero-coupon bonds and TIPS all count as net investment income. Tax-exempt municipal bond interest does not.15Internal Revenue Service. Topic No. 559, Net Investment Income Tax The thresholds are not indexed for inflation, so more households cross them each year.
Losses on Bonds
Selling a bond for less than your adjusted basis produces a capital loss. Losses offset capital gains dollar for dollar, and up to $3,000 of net loss can offset ordinary income each year ($1,500 if married filing separately). Anything left over carries forward to future years indefinitely.16Office of the Law Revision Counsel. 26 US Code 1211 – Limitation on Capital Losses
Watch the replacement. Under 26 U.S.C. 1091, buying a substantially identical security within 30 days before or after the sale disallows the loss under the wash sale rule.17Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities For bonds, “substantially identical” generally means the same issuer, coupon rate, maturity, and credit rating. A different issuer or a meaningfully different maturity typically avoids the rule, though the IRS looks at the specific facts.
Savings Bonds Used for Education
Series EE and I savings bonds get one extra break. Redeem them to pay qualified higher education expenses (tuition and fees at an eligible institution) and you can exclude some or all of the interest from federal income tax. The bonds must have been issued after 1989 to someone at least 24 years old at the time of purchase.18Office of the Law Revision Counsel. 26 US Code 135 – Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees
The exclusion phases out at higher incomes. For 2026, it starts shrinking when modified adjusted gross income exceeds $101,800 ($152,650 for joint filers) and disappears at $116,800 ($182,650 for joint filers). If you file married filing separately, you cannot claim it at all.