Yes, CDs are taxable. The interest a certificate of deposit earns is ordinary income at the federal level, and most states tax it the same way. You owe the tax in the year the interest is credited to your account, not when the CD matures, and it gets added to your other income and taxed at your marginal rate.
How the Federal Tax Works
Federal law defines gross income to include interest from any source, and CD interest falls squarely inside that definition.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined The IRS treats it the same as wages or freelance earnings: it stacks on top of everything else on your return and is taxed at whatever bracket that puts you in. Federal marginal rates run from 10% to 37% for 2026. There is no preferential rate the way there is for long-term capital gains or qualified dividends.
Your bank does not withhold income tax from the interest automatically. The full amount lands on your return, and the tax comes out of pocket when you file. That is worth remembering when you are comparing a CD yield to something else: the advertised rate is pre-tax.
When You Owe the Tax on a Multi-Year CD
This is where CD holders most often get caught out. You do not wait until the CD matures to report the interest. Under Treasury regulations, income is “constructively received” as soon as it is credited to your account or otherwise made available without substantial restrictions.2GovInfo. Treasury Regulation 1.451-2 – Constructive Receipt of Income Most banks credit CD interest monthly or quarterly. Once it hits the account, the IRS considers it received, even if the principal itself stays locked until maturity.
A five-year CD therefore produces five separate tax years of reportable interest. The bank sends you a Form 1099-INT each January covering interest credited during the prior calendar year, and you owe tax on each year’s amount whether you touched the money or not.
Deferred-Interest CDs and Original Issue Discount
Some longer-term CDs, particularly those that defer all interest until maturity, fall under a separate set of rules called original issue discount (OID). OID is the difference between what you paid for the CD and what you will receive at maturity, and the IRS requires you to include a portion of that discount in income each year as it accrues.3Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments The bank reports the annual OID on Form 1099-OID rather than 1099-INT, with the amount in Box 1.4Internal Revenue Service. Form 1099-OID
The practical result is that you pay tax each year on income you have not actually pocketed. Plan for it, because the tax bill has to come out of other money.
State Income Tax
Most states that levy a personal income tax treat CD interest as ordinary income at the state marginal rate. Nine states impose no personal income tax at all, and residents there owe nothing at the state level on CD earnings. States generally start their calculation from your federal adjusted gross income, so the interest you reported federally flows through automatically.
The bank’s location does not determine which state taxes the income. Your residency does. A CD held at a bank in another state is still taxed by your home state.
The 3.8% Surtax for Higher Earners
On top of the regular marginal rate, a 3.8% net investment income tax can apply if your income is high enough. It hits the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately.5Internal Revenue Service. Topic No. 559, Net Investment Income Tax Those thresholds are not indexed for inflation, so more taxpayers cross them each year as wages rise.
Deducting an Early Withdrawal Penalty
If you break a CD before maturity, the bank typically charges a penalty of several months’ interest. That penalty is deductible as an adjustment to income on Schedule 1 of Form 1040 (line 18), which means you do not need to itemize to claim it.6Internal Revenue Service. Publication 550, Investment Income and Expenses The penalty amount appears in Box 2 of Form 1099-INT or Box 3 of Form 1099-OID.
The deduction is not capped at the interest you earned that year. If you opened a CD in December, earned $30 of interest, and paid a $90 penalty, you deduct the full $90; the $60 excess offsets other income. Most tax software picks this up from the 1099 automatically, but it is easy to miss if you file by hand.
CDs Inside an IRA
The rules change when the CD sits inside a retirement account rather than a regular bank or brokerage account.
Traditional IRA
Interest on a CD in a traditional IRA grows tax-deferred. You owe nothing to the IRS each year as it accrues. Instead, ordinary income tax applies when you take distributions. Withdrawals before age 59½ are generally subject to an additional 10% early distribution penalty on top of the regular income tax.7Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
Roth IRA
A CD inside a Roth IRA can produce completely tax-free interest if two conditions are met: the account has been open at least five tax years, and you are at least 59½ (or qualify through another exception such as disability or a first-time home purchase).8Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Meet both, and neither the federal government nor most states will tax any of the interest.
One thing to watch in either account: the CD’s maturity date and the account’s withdrawal rules are independent. A CD maturing inside your IRA does not mean you can pull the money without tax consequences. The IRA distribution rules still apply.
How CD Interest Gets Reported
Any bank or credit union that pays you $10 or more in interest during the year must report it to you and the IRS on Form 1099-INT.9Office of the Law Revision Counsel. 26 USC 6049 – Returns Regarding Payments of Interest The form typically arrives by late January. Taxable interest is in Box 1; any early withdrawal penalty is in Box 2.10Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID For longer-term CDs that generate OID, the bank issues Form 1099-OID (sometimes both).4Internal Revenue Service. Form 1099-OID
If you earned less than $10 in interest, the bank is not required to send a form, but you are still required to report the income. The IRS has no minimum threshold for taxable interest, only for the bank’s reporting obligation. Check your year-end statement if no 1099 arrives.
Backup Withholding
Banks do not normally withhold federal income tax from CD interest. The exception is backup withholding, a flat 24% rate that applies if you did not give the bank a valid taxpayer identification number or if the IRS has notified the bank that you previously underreported interest.11Internal Revenue Service. Backup Withholding Any amount withheld appears on your 1099-INT and counts as a tax payment you can claim on your return, so it is forced prepayment rather than lost money.
Selling a Brokered CD Before Maturity
Brokered CDs, bought through a brokerage rather than directly from a bank, can be sold on the secondary market before maturity. When you sell, the tax treatment splits in two. Accrued interest through the sale date is taxed as ordinary interest income. Any gain or loss on the sale price relative to what you paid is a capital gain or loss.12Internal Revenue Service. Topic No. 409, Capital Gains and Losses
If interest rates have risen since you bought the CD, its market value has likely dropped and you may sell at a loss. That loss can offset other capital gains and up to $3,000 of ordinary income per year. If rates have fallen, the CD may sell at a premium. Whether the resulting gain is taxed at ordinary or preferential rates depends on your holding period: more than one year qualifies for long-term capital gains rates; one year or less is taxed as ordinary income. If you bought the CD at a discount to face value, part of your gain may be recharacterized as ordinary income under the accrued market discount rules, which is a good place to bring in a tax professional.
Foreign CDs
Interest on a CD at a foreign bank is taxed on your federal return the same way domestic CD interest is. Foreign accounts also trigger disclosure requirements that carry heavy penalties for noncompliance.
The FBAR (FinCEN Form 114) is required if the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year. Form 8938 under FATCA has higher thresholds: $50,000 on the last day of the tax year (or $75,000 at any time) for single filers living in the U.S., and $100,000 on the last day (or $150,000 at any time) for married couples filing jointly.13Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements Both thresholds count all specified foreign accounts, not just CDs. Missing either filing can bring penalties starting at $10,000 per violation, and willful failures carry much steeper consequences.