Interest on a certificate of deposit is taxed as ordinary income at your regular federal tax rate, which runs from 10% to 37% depending on your total taxable income for the year. So the answer to how CD interest is taxed is straightforward at the core: it stacks on top of your wages and other income and gets no preferential rate, no matter how long the CD’s term. What varies is when you owe the tax, how it gets reported, and whether extra taxes apply at higher incomes or under special account setups.
Federal Rate and How It Applies
Federal law defines gross income to include interest from all sources, and CD interest sits squarely inside that definition.1Office of the Law Revision Counsel. 26 USC 61 Gross Income Defined The IRS treats it as ordinary income, the same category as wages and salaries.2Internal Revenue Service. Topic No. 403, Interest Received You pay tax on it at your marginal bracket rate, meaning only the portion of income inside each bracket is taxed at that bracket’s rate.
For the 2026 tax year, the federal brackets for single filers are:
- 10% up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% above $640,600
Your CD interest is added on top of your other income for the year. If your salary already puts you in the 24% bracket, interest earned in the CD is taxed at 24%, or higher if it pushes you into the next bracket.3Internal Revenue Service. Federal Income Tax Rates and Brackets
When You Owe the Tax
You owe tax on CD interest in the year it is credited or made available to you, not the year you eventually withdraw it. This is the doctrine of constructive receipt. Leaving interest inside the CD to compound does not defer the tax if you could have withdrawn it.2Internal Revenue Service. Topic No. 403, Interest Received
The rule matters most on multi-year CDs. A three-year CD that earns interest monthly generates taxable income every calendar year of the term, not a single lump at maturity. The bank reports each year’s interest separately.
Zero-Coupon and OID CDs
Some CDs are sold at a discount and pay no interest until maturity. Pay $9,500 for a CD that returns $10,000 in three years, and the $500 difference is original issue discount (OID), which the IRS treats as a form of interest. You include OID in income as it accrues each year, even though no cash changes hands until maturity. The issuer reports the annual accrual on Form 1099-OID when the amount is $10 or more and the term exceeds one year.4Internal Revenue Service. Publication 1212 Guide to Original Issue Discount (OID) Instruments
How to Report CD Interest
Banks and credit unions report interest paid to you on Form 1099-INT, sent to you and to the IRS. A financial institution must issue the form when total interest paid during the calendar year is $10 or more.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Even below $10, where no form is issued, you are still required to report the interest.
If total taxable interest from all sources exceeds $1,500 for the year, you must file Schedule B with your Form 1040 and list each payer.6Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends Below that threshold, you report the total directly on Form 1040 without Schedule B.
Backup Withholding
If you gave the bank an incorrect Social Security number or taxpayer ID, or the IRS notified the bank that your name and number don’t match its records, the bank may be required to withhold 24% of your interest and send it to the IRS. Correcting the identification information with the payer stops the withholding.7Internal Revenue Service. Backup Withholding
Deducting an Early Withdrawal Penalty
Cashing out a CD before maturity usually triggers a bank penalty. You can deduct that penalty as an above-the-line adjustment on Schedule 1 of Form 1040, so it lowers your adjusted gross income whether or not you itemize.
You report the full interest earned as income and then claim the penalty separately. If the CD earned $500 in interest and the bank charged a $100 early withdrawal penalty, you report the full $500 as interest and deduct the $100 on Schedule 1, leaving tax due on $400. The penalty amount appears in Box 2 of Form 1099-INT.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
The 3.8% Net Investment Income Tax
Higher earners may owe an extra 3.8% Net Investment Income Tax (NIIT) on top of regular income tax, and CD interest counts as net investment income for this purpose.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax It applies when modified adjusted gross income exceeds:
- $200,000 for single or head of household filers
- $250,000 for married filing jointly or qualifying surviving spouse
- $125,000 for married filing separately
The 3.8% applies to the lesser of your net investment income or the amount by which your modified AGI exceeds the threshold. These thresholds are set by statute and are not indexed for inflation.9Internal Revenue Service. Questions and Answers on the Net Investment Income Tax A single filer earning $220,000 with $5,000 in CD interest would owe NIIT on the lesser of $5,000 or the $20,000 excess over $200,000, so the full $5,000 carries an extra $190.
State Tax Treatment
Most states that tax income treat CD interest the same way the federal government does: ordinary income at the state’s regular rate. State rates run from about 1% to over 13%. Eight states impose no individual income tax, so residents there face no state tax on CD interest.
Unlike interest from U.S. Treasury securities, which is exempt from state income tax, and many municipal bonds, which may be exempt from both, bank CD interest gets no state-level exclusion. State tax agencies routinely share data with the IRS, so interest left off one return tends to surface on the other.10Internal Revenue Service. IRS Information Sharing Programs
Situations That Change the Answer
CDs Held in an IRA
A CD held inside a Traditional IRA grows tax-deferred. You owe no annual tax on the interest; you pay ordinary income tax when you withdraw in retirement. In a Roth IRA, the interest grows tax-free, and qualified withdrawals (generally after age 59½ and at least five years after your first Roth contribution) are exempt from federal income tax. The tradeoff is contribution limits and, generally, a 10% federal penalty on withdrawals before 59½, on top of any income tax owed. That penalty is separate from, and typically steeper than, the bank’s early withdrawal fee for breaking a CD.
CDs in a Child’s Name
Interest on a CD titled to a child is the child’s unearned income. For the 2025 tax year (the most recent figures the IRS has published), a child’s unearned income above $2,700 is taxed at the parent’s marginal rate under the “kiddie tax.” It applies to children under 18, and in some cases to 18-year-olds and full-time students aged 19–23 who don’t provide more than half their own support. The tax is calculated on Form 8615. Parents may instead elect to report the child’s interest on their own return using Form 8814 if the child’s gross income is below $13,500 and consists only of interest, ordinary dividends, and capital gain distributions.11Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
Brokered CDs Sold Before Maturity
Brokered CDs, bought through a brokerage rather than directly from a bank, can be sold on a secondary market. A sale price above what you paid is a capital gain; below is a capital loss. Those amounts are taxed under capital gains rules rather than as ordinary interest, and they appear on your brokerage 1099 separately from the interest the CD paid while you held it. Interest that accrued between the last payment date and the sale date may need to be handled on Schedule B, so review year-end brokerage statements carefully.