The capital gains tax on bonds runs from 0% to 23.8% at the federal level, depending on how long you held the bond and how much you earn. The tax applies when you sell a bond for more than your adjusted cost basis, whether the sale happens on the secondary market, at maturity after buying at a discount, or through a call by the issuer. That treatment is separate from the tax on bond interest, which is almost always taxed as ordinary income. Confusing the two, or missing a basis adjustment along the way, is where investors overpay or trigger IRS notices.
When a Bond Sale Produces a Capital Gain
The most common trigger is selling a bond on the secondary market before maturity. When interest rates fall, existing bonds carrying higher coupons become more valuable, and selling into that window creates a gain equal to the difference between your sale price and your adjusted cost basis. That profit is a capital gain even though the price movement came from rate dynamics.
Holding a bond to maturity can also produce a gain if you bought it at a discount. Pay $950 for a bond with a $1,000 par value, hold it to redemption, and you have a $50 profit. Whether that $50 counts as a capital gain or as ordinary income depends on the type of discount, covered below. Buying above par and holding to maturity produces no capital gain, because you get back less than you paid.
Figuring Your Cost Basis
Cost basis starts with what you actually paid for the bond, plus transaction costs like brokerage commissions. A bond bought for $1,000 with a $15 commission has a starting basis of $1,015. That full amount comes back to you tax-free before any profit is recognized.
One detail trips people up: accrued interest paid to the seller when you buy between coupon dates. Part of your payment covers interest that has built up since the last coupon. That accrued interest does not go into your basis. Instead, when you receive the next full coupon, you subtract the accrued interest you paid from the interest income reported on Schedule B.1Internal Revenue Service. Instructions for Schedule B (Form 1040) Rolling accrued interest into basis would understate your gain later.
Basis Adjustments That Change the Gain
Original Issue Discount
When a bond is issued below face value, the spread is original issue discount. Federal tax law treats OID as interest that accrues annually, even without cash changing hands, and each year’s accrued OID is added to your basis. A zero-coupon bond issued at $700 with a $1,000 face value has you reporting a portion of the $300 spread as interest income each year, with your basis rising in step.2Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) By maturity, basis should roughly equal face value, largely eliminating any capital gain.
Market Discount and the De Minimis Rule
Market discount is different. It arises when you buy an existing bond on the secondary market for less than face value. When you later sell or redeem it, the gain attributable to that discount is generally taxed as ordinary income, not as a capital gain. The profit feels like price appreciation, but the tax code treats it more like deferred interest.
There is a small-discount exception. If the discount is less than 0.25% of face value multiplied by the number of complete years remaining to maturity, it counts as de minimis and the gain at sale or redemption gets capital gains treatment.3Office of the Law Revision Counsel. 26 USC 1278 – Definitions and Special Rules For a $1,000 bond with 10 years left, the threshold is $25. Pay $976 and the $24 gain is a capital gain. Pay $974 and the $26 gain is ordinary income.
Amortizing a Bond Premium
Buy a taxable bond above face value and you can elect to amortize the premium over the bond’s remaining life. Each year a portion offsets your interest income and reduces your basis. The election applies to all taxable bonds you hold and is binding unless the IRS grants permission to revoke it.4Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium It makes sense when you would rather reduce taxable interest each year than claim a capital loss at maturity.
For tax-exempt bonds the math changes. Amortization is mandatory, and the amortized amount reduces basis each year, but because the interest is exempt you get no deduction for the amortization. Basis declines steadily, which can produce a capital gain if you sell before maturity above your adjusted basis.5eCFR. 26 CFR 1.171-2 – Amortization of Bond Premium
Holding Period and 2026 Rates
How long you hold the bond decides whether the gain sits at ordinary income rates or at long-term capital gains rates. The line is one year. Sell at 365 days or less and the profit is short-term, taxed at ordinary rates from 10% to 37%. Hold longer than a year and the gain is long-term.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, long-term capital gains rates for single filers are:
- 0% on taxable income up to $49,450
- 15% on taxable income from $49,451 to $545,500
- 20% on taxable income above $545,500
For married couples filing jointly, the 0% rate applies up to $98,900, 15% covers $98,901 to $613,700, and 20% starts above $613,700.7Internal Revenue Service. Revenue Procedure 2025-32 The gap between short- and long-term treatment can be large. A 37%-bracket seller who waits one extra day past the one-year mark can nearly halve the tax on the gain.
High earners face another layer. The 3.8% Net Investment Income Tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.8Internal Revenue Service. Net Investment Income Tax NIIT reaches both short- and long-term gains, pushing the effective top rate on long-term bond gains to 23.8%.
How the Rules Shift by Bond Type
Municipal Bonds
The tax exemption on municipal bond interest does not carry over to capital gains. Sell a muni above your adjusted basis and the profit is taxable at regular capital gains rates. “Tax-exempt” only covers the coupon payments. Interest on certain private activity municipal bonds also counts as a preference item under the alternative minimum tax, so filers subject to AMT lose some of the interest advantage as well.9Office of the Law Revision Counsel. 26 USC 57 – Items of Tax Preference
Treasury Bonds
Interest on U.S. Treasury securities is exempt from state and local income tax, but capital gains from selling Treasuries are fully taxable federally and receive no special state exemption. Federal treatment matches corporate bonds: short-term gains at ordinary rates, long-term gains at preferential rates.
TIPS
Treasury Inflation-Protected Securities create a phantom income problem. Each year, principal adjusts up or down with inflation, and any upward adjustment is taxable as OID in the year it occurs, even though no cash arrives until sale or maturity.2Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) Your basis rises by the amount you report. Hold TIPS to maturity through a period of positive inflation and basis should sit close to the redemption amount, having already been taxed along the way.
Zero-Coupon Bonds
Zeros pay no periodic interest. They are issued at a deep discount and redeemed at face value, and the entire spread is treated as OID, reported as interest annually. Because basis climbs each year with the accrual, holding to maturity usually leaves no capital gain. Selling early can still create one if the market price exceeds the OID-adjusted basis.
Worthless Corporate Bonds
When a corporate issuer defaults and the bond becomes completely worthless, you do not have to sell to claim the loss. The tax code treats worthless securities as if sold on the last day of the tax year in which they became worthless.10Internal Revenue Service. Losses (Homes, Stocks, Other Property) The loss is a capital loss, short- or long-term based on your holding period up to that point. The practical difficulty is pinpointing the correct year; claim it in the wrong one and the deduction can be denied.
Inherited and Gifted Bonds
Bonds You Inherit
Inherit a bond and your basis resets to the fair market value on the date the original owner died.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If the decedent paid $900 for a bond now worth $1,050, your basis is $1,050, and the appreciation during their lifetime disappears from the tax base. Any gain above $1,050 is yours to report. The executor can elect to value estate assets six months after death, but only if the estate’s overall value declined during that window. Inherited bonds also get automatic long-term treatment regardless of how long anyone held them.
Bonds Received as Gifts
Gifted bonds carry the donor’s basis when the fair market value at the time of the gift equals or exceeds that basis. If the donor paid $950 for a bond worth $1,020 when given to you, your basis for calculating a gain is $950.12Internal Revenue Service. Property (Basis, Sale of Home, etc.) If the fair market value at the gift date is below the donor’s basis, the rules split: use the donor’s basis for calculating a gain, and the lower fair market value for calculating a loss. Your holding period generally includes the donor’s, so a bond the donor held for two years qualifies for long-term treatment on day one for you.13Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
Losses, Netting, and Wash Sales
Selling below your adjusted basis produces a capital loss. Losses first offset gains of the same type: short-term against short-term, long-term against long-term. If one category still shows a net loss after that, the remainder offsets the other category.14Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
When total losses exceed total gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Anything left carries forward indefinitely, keeping its short- or long-term character.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses There is no expiration on the carryforward, so a large loss from a default can lower taxes for many years.
The wash sale rule cuts against loss harvesting. Sell a bond at a loss and buy a substantially identical bond within 30 days before or after, and the deduction is disallowed for that year. The disallowed loss shifts into the basis of the replacement bond, so it is deferred rather than lost.15Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities Defining “substantially identical” is the tricky part with bonds. Different issuers are generally not substantially identical even when terms are similar, but buying back the same issuer’s bond with the same coupon and maturity inside the window will likely trigger the rule. The safer approach when harvesting bond losses is to switch issuers or terms meaningfully and wait out the full 61-day window before repurchasing anything close.
Reporting Bond Gains to the IRS
Your broker sends Form 1099-B after any year in which you sell or redeem bonds, reporting sale proceeds, the cost basis for covered securities, and whether the gain is short- or long-term.16Internal Revenue Service. Instructions for Form 1099-B Check the reported basis. Brokers must track basis for bonds acquired after January 1, 2014, but older holdings and bonds transferred between brokers can show incorrect or missing information. If the basis is wrong, correct it on your return using your own records.
Each transaction goes on Form 8949, with acquisition date, sale date, proceeds, basis, and any adjustments. Short-term and long-term transactions sit in separate sections. Totals flow to Schedule D of Form 1040, which produces your net capital gain or loss for the year.17Internal Revenue Service. Instructions for Form 8949 The IRS matches your return against the 1099-B data your broker submitted, and mismatches are a reliable way to draw an automated notice.
State Taxes on Bond Gains
Federal tax is only part of the bill. Most states tax capital gains as ordinary income, with top rates from 0% in no-income-tax states to above 13% in the highest-tax states. A handful exempt certain investment gains or apply reduced rates. For a high-income investor in a high-tax state, the combined federal and state burden on a bond gain can approach 37%, which makes the one-year holding period and the loss-harvesting rules above worth attention before executing a large sale.