Yes, you have to pay taxes on a CD. The interest a certificate of deposit earns is taxed as ordinary income on your federal return, and the IRS doesn’t care whether you pull the interest out or let it roll back into the CD — you owe tax on it either way.1Internal Revenue Service. Topic No. 403, Interest Received What you owe depends on your tax bracket, and when you owe it depends on the CD’s term and how the bank credits interest.
How CD Interest Is Taxed
The IRS treats CD interest as ordinary income, not as a capital gain. That distinction matters. Long-term capital gains get preferential rates of 0%, 15%, or 20%. Ordinary income is taxed at your full marginal rate, which for 2026 runs from 10% to 37%. A CD advertised at 5% doesn’t net you 5% after tax. In the 24% bracket, that headline rate drops to roughly 3.8% in your pocket.
Most states with an income tax also tax CD interest. Only a handful of states impose no income tax, so state tax usually stacks on top of the federal bite. Bank CDs get no state-level exemption, unlike U.S. Treasury securities, whose interest is exempt from state and local income tax.1Internal Revenue Service. Topic No. 403, Interest Received
When You Owe the Tax
For CDs that mature in one year or less, timing is simple. You report the interest in the year the CD pays it out or credits it to your account.2Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Certificates of Deposit and Other Deferred Interest Accounts A 12-month CD maturing in October 2026 generates 2026 taxable income.
Multi-year CDs are trickier. The IRS uses a concept called constructive receipt: income counts as yours in the year you could have accessed it, even if you didn’t.3eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income If your three-year CD credits interest annually or lets you withdraw accrued interest without a substantial penalty, you owe tax on each year’s share as it accrues, not at maturity.
Deferred-Interest CDs and Form 1099-OID
Some multi-year CDs don’t pay interest along the way. All the interest rolls into principal and pays out in a lump at maturity. The IRS treats that deferred interest as original issue discount, and you must report a portion of it as income each year even though you haven’t received a cent.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Certificates of Deposit The bank sends you Form 1099-OID each year showing how much to include.5Internal Revenue Service. About Form 1099-OID, Original Issue Discount
This one catches people off guard. You can owe several hundred dollars in tax on interest you won’t see for two more years. If you cash out a deferred-interest CD before maturity for less than the full redemption price, you can deduct any OID you already reported but never received.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Certificates of Deposit
To figure out which rule applies to your CD, check the agreement for two things: how often interest is credited, and whether the bank imposes a substantial penalty for early withdrawal of that interest. If interest is credited annually and accessible without a major penalty, constructive receipt puts it on your tax return each year. If interest is deferred until maturity on a CD longer than a year, the OID rules cover it, and you still owe tax annually.
Reporting CD Interest on Your Tax Return
Your bank or credit union sends you Form 1099-INT for any year the CD earns $10 or more in interest. Box 1 shows the taxable amount.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Deferred-interest CDs get a 1099-OID instead, with the annual amount in Box 1.7Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Form 1099-OID
Report the interest on your Form 1040 on the line for taxable interest. If your total taxable interest and ordinary dividends for the year top $1,500, fill out Schedule B as well.8Internal Revenue Service. Instructions for Schedule B (Form 1040)
One detail people miss: even if your CD earns less than $10 and no 1099-INT shows up, the interest is still taxable. The $10 threshold only decides whether the bank has to send you the form. You’re responsible for reporting all interest income regardless.
Deducting an Early Withdrawal Penalty
Cashing out a CD before maturity triggers a penalty from the bank, usually a set number of months of interest. The IRS lets you deduct that penalty as an adjustment to income on Schedule 1 of Form 1040, Line 18.9Internal Revenue Service. 2025 Schedule 1 (Form 1040) It’s an above-the-line deduction, so it reduces your adjusted gross income whether you itemize or take the standard deduction.
In practice, your 1099-INT shows the full interest in Box 1 and the penalty in Box 2. You report the full interest as income, then claim the penalty separately on Schedule 1.10Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Interest Subject to Penalty for Early Withdrawal The net effect is that you’re taxed only on the interest you actually kept. A severe penalty can even exceed the current year’s interest and produce a net deduction against other income.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% on CD interest through the Net Investment Income Tax. It kicks in when your modified adjusted gross income tops the following thresholds:11Internal Revenue Service. Net Investment Income Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
The surtax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. CD interest counts as net investment income.11Internal Revenue Service. Net Investment Income Tax These thresholds are fixed by statute and aren’t indexed for inflation, so more taxpayers cross them each year. Someone in the 37% federal bracket who also owes the surtax pays 40.8% on CD interest before any state tax.
When You Don’t Pay Tax Each Year: CDs in Retirement Accounts
Holding a CD inside a qualified retirement account changes the whole picture. The CD still has a fixed rate and a fixed term, but the account wrapper controls when — and whether — you’re taxed on the interest.
Traditional IRA
Interest on a CD inside a Traditional IRA isn’t taxed as it accrues. No 1099-INT arrives, and you don’t report annual interest on your return. The full amount is taxed as ordinary income when you withdraw it from the IRA.12Internal Revenue Service. Traditional IRAs The deferral is useful during peak earning years, but every dollar coming out in retirement is taxed at your ordinary rate.
Roth IRA
A CD inside a Roth IRA is the most tax-efficient option. Interest grows tax-free, and qualified withdrawals aren’t taxed at all. To qualify, the Roth must have been open at least five years, and you must be at least 59½ when you take the distribution.13Internal Revenue Service. Roth IRAs Meet both conditions and neither the contributions nor the accumulated CD interest is ever taxed.
One planning wrinkle for Traditional IRAs: starting at age 73, you must take required minimum distributions each year.14Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) If the IRA holds a CD that hasn’t matured, you may have to break it early and pay the bank’s penalty. Some custodians waive or reduce CD penalties for RMD withdrawals; the practice varies. Roth IRAs have no lifetime RMDs, so the conflict doesn’t come up.
Special Situations
A CD in a Child’s Name
Parents sometimes open CDs in a child’s name hoping the interest gets taxed at the child’s lower rate. That works only up to a point. For 2026, a child’s unearned income — including CD interest — falls into three tiers:15Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income
- First $1,350: covered by the child’s standard deduction, no tax owed.
- Next $1,350: taxed at the child’s rate, usually 10%.
- Above $2,700: taxed at the parent’s marginal rate.
The kiddie tax applies to children under 18, children who are 18 and don’t earn more than half their own support, and full-time students aged 19 through 23 who don’t earn more than half their support. If the child’s unearned income tops $2,700, file Form 8615 with the child’s return.15Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income For smaller amounts, parents can use Form 8814 to include the child’s interest on their own return instead.
An Inherited CD
When the owner of a CD dies, tax treatment of the interest splits at the date of death. Interest that accrued before the owner died is income in respect of a decedent and goes on the deceased person’s final return, or on the estate’s return. Interest that accrues after the date of death is ordinary income to whoever inherits the CD, whether that’s a named beneficiary or the estate.
The CD principal itself passes to the beneficiary without triggering income tax. There’s no step-up in basis for accrued interest the way there is for appreciated stock. If you inherit a CD, check that the 1099-INT you receive doesn’t accidentally include the decedent’s pre-death interest, which belongs on a different return.
A CD at a Foreign Bank
A U.S. person holding a CD at a foreign bank owes federal tax on the interest just like on a domestic CD. There’s also a reporting obligation many people don’t know about. If the total value of all your foreign financial accounts — bank accounts, brokerage accounts, CDs — tops $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network by April 15.16Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts
The $10,000 test is aggregate, not per account. A $6,000 CD at one foreign bank plus a $5,000 checking account at another triggers the filing. Penalties for missing the form are steep: up to $10,000 per non-willful violation, and the greater of $100,000 or 50% of the account balance for willful violations.17Internal Revenue Service. 4.26.16 Report of Foreign Bank and Financial Accounts (FBAR)