Capital gains tax on bonds works like the tax on any other capital asset: if you sell a bond for more than your adjusted cost basis, the profit is taxable. Federal rates run from 0% to 20% when you have held the bond more than a year, and from 10% to 37% when you have held it a year or less.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Higher earners pay an additional 3.8% surtax on top. The complication with bonds is that “what you paid” is rarely your real basis: premium amortization, original issue discount, market discount, and accrued interest at purchase all change the number, and getting any of them wrong means paying tax on the wrong figure.
How a Bond Sale Turns Into a Gain
The typical path is selling on the secondary market before maturity for more than you paid. Interest rates drop after you buy, your bond’s fixed coupon looks better than what new bonds are paying, and the market price rises above your cost. The difference between sale price and adjusted basis is the taxable gain.
You can also realize a gain at maturity if you bought below face value. Pay $950 for a bond the issuer redeems at $1,000 and the $50 spread is taxable. Whether it lands as capital gain or ordinary income depends on whether that discount is “market discount,” which is covered below.
Short-Term and Long-Term Rates
The holding period does the heaviest lifting on the tax bill. Sell within a year of purchase and the gain is short-term, taxed at your ordinary income rate, which for 2026 runs between 10% and 37%. Hold longer than a year and the gain qualifies for long-term rates.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Long-term rates for 2026 are 0%, 15%, or 20%, depending on taxable income and filing status. Single filers pay 0% on long-term gains up to $49,450 in taxable income, 15% from $49,450 to $545,500, and 20% above that. Married couples filing jointly reach the 15% bracket at $98,900 and the 20% rate at $613,700. On a large position the difference between short- and long-term treatment can be thousands of dollars, so the calendar matters.
Count the holding period from the day after you acquired the bond through the day you sell. Buy on January 15, 2025 and the first sale date that qualifies for long-term treatment is January 16, 2026.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The 3.8% Net Investment Income Tax
A separate 3.8% surtax applies to investment income, including bond capital gains, once your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). The tax hits the smaller of your net investment income or the amount by which your income exceeds the threshold.2Internal Revenue Service. Net Investment Income Tax The thresholds aren’t indexed for inflation, so more filers cross them each year. Stacked with the 20% long-term rate, the top effective federal rate on a bond capital gain reaches 23.8%.
Getting Your Cost Basis Right
Basis starts with everything you paid to acquire the bond, including broker commissions and transaction fees. Pay $1,020 for a $1,000-face bond and your starting basis is $1,020. Every dollar of overstated basis understates your gain; every dollar of understated basis means paying tax on your own principal.
Accrued Interest at Purchase
Buying a bond between coupon dates means part of the price you paid is interest that accrued before you owned it. That accrued interest is not part of your basis. When the next coupon arrives, the IRS treats the pre-purchase portion as a return of capital rather than taxable interest, and you subtract it from the interest you report on Schedule B.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses Rolling accrued interest into basis inflates it and can manufacture a phantom loss at sale.
Premium Amortization
If you buy a taxable bond at a premium (above face value), you can amortize the premium over the bond’s remaining life. Each year a slice of the premium offsets your taxable interest, and your basis drops by the same amount.4Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium By maturity your adjusted basis equals face value, and there’s no gain or loss to report at redemption. Without amortization you’d overreport interest for years and then take a capital loss at the end.
Municipal bond premiums work differently. Amortization is mandatory but produces no deduction, because the interest was never taxable to begin with. Basis still drops each year, which means a larger gain (or smaller loss) whenever you sell. Investors who skip this step often understate their gain on a muni sale.
Discount Bonds: OID vs. Market Discount
Bonds bought below face split into two categories, and the tax rules diverge sharply.
Original Issue Discount
When a bond is issued below face value, the gap is original issue discount (OID). Zero-coupon bonds are the obvious case. Rather than let you defer the discount until maturity as a capital gain, the IRS requires you to include a portion of the OID in ordinary income each year as it accrues, even though no cash arrives until maturity.5Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount The accrued OID also increases your basis each year, so you’re not taxed twice when the bond finally pays out.
A de minimis exception treats the OID as zero when the discount is less than 0.25% of face value multiplied by full years to maturity, in which case the discount becomes a capital gain at sale or redemption rather than annual ordinary income.6Office of the Law Revision Counsel. 26 USC 1273 – Determination of Amount of Original Issue Discount
Market Discount
Market discount is the discount you pick up when you buy a bond on the secondary market for less than its adjusted issue price. The trap here is that gain attributable to accrued market discount is taxed as ordinary income, not capital gain, when you sell or the bond is redeemed.7Office of the Law Revision Counsel. 26 USC 1276 – Disposition Gain Representing Accrued Market Discount Treated as Ordinary Income Only the gain above the accrued discount qualifies for long-term capital gains rates.
Accrued market discount is calculated either ratably (the default, evenly across days to maturity) or under a constant interest rate election, which is irrevocable once made for a given bond. The same 0.25%-per-year de minimis test applies: fall below it and the entire discount is capital gain rather than ordinary income.8Municipal Securities Rulemaking Board. Tax and Liquidity Considerations for Buying Discount Bonds
Municipal Bonds
Municipal bond interest is generally exempt from federal income tax. Capital gains on munis are not. Sell a muni on the secondary market for more than your adjusted basis and the profit is taxable at the same short- or long-term rates as any other bond.
States usually exempt interest on their own bonds and tax interest on out-of-state munis, but capital gains on municipal bonds are generally taxable at the state level regardless of the issuer. A high-tax-state resident selling an appreciated out-of-state muni can owe federal capital gains tax and state income tax on the same profit, despite never having paid federal tax on the interest.
Treasury Securities
Interest on U.S. Treasury bonds, notes, and bills is exempt from state and local income tax under federal law.9Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation Capital gains from selling Treasuries before maturity are fully taxable federally. State treatment of those gains varies: some states exempt them, others tax them like any other gain. Check your state’s rule before assuming a Treasury sale is state-tax-free.
Treasury Inflation-Protected Securities create a specific headache. Each inflation adjustment to principal is taxable in the year it occurs, even though you don’t collect the adjusted principal until maturity. The phantom income lifts your basis, so the gain at maturity is smaller, but the annual cash-flow mismatch is real. Many planners hold TIPS in tax-advantaged accounts for this reason.
Bond Funds and ETFs
Owning bonds through a fund doesn’t eliminate capital gains tax, it just changes where it shows up. When the fund’s manager sells bonds at a profit, the fund passes those gains through as capital gain distributions, which are taxable to you even if you reinvested every dollar and never sold a share.10Internal Revenue Service. Mutual Funds (Costs, Distributions, etc.)
Capital gain distributions from a bond fund are always long-term, regardless of how long you have owned the fund shares. They appear in Box 2a of Form 1099-DIV and flow to Schedule D. Gain or loss when you sell fund shares themselves follows the normal short- vs. long-term rules based on your own holding period.
Selling fund shares also forces a cost-basis method choice: average cost pools all shares into one price, first-in-first-out sells the oldest lots first, and specific identification lets you pick lots. For ETFs the default is first-in-first-out unless you elect otherwise. The method drives whether a sale is short- or long-term and how large the gain is.
Inherited Bonds
Inherit a bond and your basis generally resets to fair market value on the date of the decedent’s death. If the original owner paid $800 and the bond was worth $980 when they died, your basis is $980.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Sell later for $1,000 and only the $20 above the stepped-up basis is taxable.
Inherited assets are automatically treated as long-term for capital gains purposes, no matter how briefly the decedent held them or how quickly you sell. One boundary worth flagging: U.S. Savings Bonds (Series EE and I) do not receive a step-up, and the accumulated interest becomes taxable to the estate or the beneficiary.
Capital Losses on Bonds
When interest rates rise, existing bonds lose value, and selling at a loss produces a capital loss you can use against gains. If losses for the year exceed gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and any remainder carries forward indefinitely.12Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses A $15,000 net loss would absorb $3,000 in the current year and roll $12,000 into future years.
The Wash Sale Rule
Sell a bond at a loss and buy a “substantially identical” security within 30 days before or after the sale, and the IRS disallows the loss.13Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed loss isn’t erased; it’s added to the basis of the replacement bond and recovered when you sell that one, but the timing shift can be painful if you were counting on the loss in the current year.
For bonds, “substantially identical” is narrower than many investors expect. Bonds from the same issuer with different maturity dates or coupon rates are generally not substantially identical. Selling a 10-year Treasury note at a loss and buying a 5-year Treasury within the window typically doesn’t trigger the rule. Selling and repurchasing the exact same bond does.
Reporting Bond Sales on Your Return
Bond sales go on Form 8949, which feeds Schedule D of your Form 1040. Each transaction lists the date acquired, date sold, proceeds, basis, and resulting gain or loss, with short-term and long-term transactions in separate sections.14Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
Your broker sends Form 1099-B reporting proceeds and, for covered securities, the cost basis of each sale.15Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions Read those figures carefully. Brokers sometimes report the wrong basis on premium or discount bonds, especially older ones acquired before current cost-basis reporting rules. When the 1099-B is wrong, correct it on Form 8949 using the adjustment codes rather than accepting the broker’s number.
Failing to report a bond sale that appears on a 1099-B is one of the fastest ways to draw an IRS notice, because the agency’s matching system compares 1099-B data to your return line by line. The accuracy-related penalty for a substantial understatement is 20% of the underpaid tax.16Internal Revenue Service. Accuracy-Related Penalty