How to Report Bond Income on Your Tax Return

To report bond income on your tax return, put interest payments on Form 1040 (with Schedule B if your total taxable interest tops $1,500), and report any gain or loss from selling a bond before maturity on Form 8949, with the totals flowing to Schedule D. Interest is ordinary income taxed at your regular rate; sale profits are capital gains taxed by how long you held the bond. The complications come from the type of bond: municipals, Treasuries, savings bonds, discount bonds, and premium bonds each add a wrinkle to that basic framework.

Where Interest Income Goes

Your broker or bank sends a Form 1099-INT each year summarizing interest paid. Box 1 shows total taxable interest, which covers corporate bond interest and U.S. Treasury interest.¹ That amount goes on your Form 1040 as ordinary income.

If your total taxable interest from all sources exceeds $1,500 for the year, you must file Schedule B with your return and list each payer with its amount.² Below that threshold, you still report the interest, just without the extra form.

Treasury interest is federally taxable but exempt from state and local income tax.³ You claim that exemption on your state return; the federal reporting is unchanged.

Tax-Exempt Municipal Interest

Interest from municipal bonds is generally exempt from federal income tax, but you still have to report it. Your broker shows the amount in Box 8 of Form 1099-INT, and you enter the total on Line 2a of Form 1040.⁴ Skipping Line 2a is one of the more common mistakes that generates an IRS notice, because tax-exempt interest still factors into your modified adjusted gross income and affects eligibility for various credits, deductions, and surtaxes.

Where Bond Sales Go

Selling a bond before maturity produces a capital gain or loss equal to the difference between your sale proceeds and your adjusted basis. Your broker reports the proceeds in Box 1d of Form 1099-B and, for covered securities, the cost basis in Box 1e.⁵ You use that information to complete Form 8949, and the totals flow to Schedule D of your Form 1040.⁶

Holding period determines the rate. Bonds held one year or less produce short-term gains taxed at your ordinary income rate. Hold for more than a year and any gain qualifies for the long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income. Capital losses offset capital gains dollar for dollar, and if losses exceed gains you can deduct up to $3,000 of the excess against ordinary income each year, carrying any remainder forward.⁷

Covered vs. Non-Covered Bonds

This distinction matters more than most investors realize. Debt instruments acquired on or after January 1, 2014, are generally classified as covered securities.⁸ For covered bonds, your broker reports both the proceeds and the adjusted cost basis to you and to the IRS.

For non-covered bonds, acquired before 2014, the broker reports only the sale proceeds. No basis goes to the IRS. You are responsible for calculating and reporting the correct basis yourself on Form 8949. If you leave it blank or enter zero, the IRS treats the entire sale price as gain. Older bonds can create surprisingly large and completely avoidable tax bills this way.

Even for covered bonds, your broker’s basis may need adjusting. Brokers must track OID accruals on covered bonds, but their handling of bond premium amortization or market discount elections can be inconsistent. If you made either election, verify that the reported basis matches your records and use adjustment codes on Form 8949 to correct it.

Accrued Interest When You Buy or Sell Mid-Period

Bonds pay interest on a set schedule but trade whenever markets are open. When you buy a bond between coupon dates, you pay the seller the market price plus the interest that has accumulated since the last payment. That creates a reporting adjustment for both sides.

If you sold the bond, the accrued interest you received is ordinary interest income for the year of the sale, not part of the capital gain or loss calculation.⁹

If you bought the bond, you will eventually receive a full interest payment covering the accrued period you already paid for. Your 1099-INT will show that entire payment, overstating your actual income. The fix: report the full 1099-INT amount on Schedule B, then subtract the accrued interest you paid at purchase on a separate line labeled “Accrued Interest.” You end up paying tax only on the interest earned after your purchase date.⁹

Discount Bonds, Premium Bonds, and TIPS

Bonds bought above or below face value carry extra reporting requirements. These rules exist to prevent what is essentially interest income from being converted into more favorably taxed capital gains.

Original Issue Discount

When a bond is first issued at a price below face value, the difference is original issue discount. Zero-coupon bonds are the classic case: pay $800, receive $1,000 at maturity, with the $200 difference representing your interest. You must report a portion of the OID as ordinary interest income each year, even though no cash arrives until maturity. Your broker reports the annual accrual in Box 1 of Form 1099-OID.¹⁰ Any periodic interest the bond also pays appears in Box 2 of the same form. Each year’s accrual increases your basis so you aren’t taxed twice when you sell or redeem.

Treasury Inflation-Protected Securities

TIPS add a twist. The principal adjusts upward with inflation, and the IRS treats that inflation adjustment as OID you must report annually, even though the increased principal doesn’t reach you until maturity. If deflation produces a negative adjustment, you can use it to offset other interest income from the same bond.¹¹ This phantom income is the most-complained-about feature of holding TIPS in a taxable account.

Market Discount

Market discount is different from OID. It applies when you buy an already-issued bond on the secondary market for less than face value. You generally do not report the discount as income each year. Instead, when you sell or redeem the bond, any gain up to the amount of the accrued market discount is taxed as ordinary income rather than capital gain.¹²

Say you buy a bond for $9,500 with a $10,000 face value and later sell it for a $700 gain. The first $500 is ordinary income; only the remaining $200 gets capital gains treatment. You can elect to accrue the market discount annually instead, spreading the ordinary income over the years you hold the bond and increasing your basis as you go. Very small discounts fall under a de minimis exception and are treated as zero.¹³

Bond Premium Amortization

When you pay more than face value for a taxable bond, you have a premium. Since you only receive face value at maturity, the premium reduces your yield. You can elect to amortize the premium, deducting a portion each year against the bond’s interest income and reducing your basis by the same amount.¹⁴

The election is sticky. Once you choose to amortize on any taxable bond, it applies to every taxable bond you own and every one you buy later. Revoking requires IRS permission.¹⁴ Skip the election and you keep your full basis, recognizing a capital loss when the bond matures at face value.

For tax-exempt municipal bonds, premium amortization is mandatory, not optional. Because the interest is already tax-free, amortization does not reduce your reportable interest; it only reduces your basis.¹⁵ Failing to reduce basis on a muni means overstating a loss or understating a gain at sale or maturity.

Savings Bonds Have Their Own Timing Choice

Series EE and Series I savings bonds work differently from most bonds because you choose when to report the interest. Most people defer until they cash the bond or it matures, receiving a single 1099-INT for the full accumulated interest at that point. You can also elect to report the interest annually as it accrues.¹⁶

Reporting annually sometimes makes sense for bonds in a child’s name, where a low tax bracket means little or no tax each year. Switching from deferred to annual reporting requires reporting all previously unrecognized interest in the year of the change, and the switch applies to every savings bond tied to that Social Security number. Going the other direction requires filing Form 3115.¹⁶

If you cash Series EE or Series I bonds issued after 1989 and use the proceeds for qualified higher education expenses, you may exclude some or all of the interest from income. The bonds must have been issued in your name (or jointly with your spouse), and you must have been at least 24 years old when they were issued. Qualified expenses include tuition and fees but not room and board.¹⁷

Income limits apply. For 2025 returns, the exclusion begins phasing out at $99,500 for single filers and $149,250 for married filing jointly, disappearing entirely at $114,500 and $179,250. Claim the exclusion on Form 8815, attached to your return.¹⁷

Foreign Bond Interest

Interest on bonds issued by foreign governments or corporations is generally taxable on your U.S. return just like domestic bond interest. Many foreign countries withhold tax on interest before it reaches you. To avoid double taxation, claim a foreign tax credit on Form 1116 for the taxes withheld abroad; foreign bond interest falls in the passive category income bucket.¹⁸

If total foreign taxes paid are $300 or less ($600 if married filing jointly), you can often claim the credit directly on Form 1040 without filing Form 1116. Box 6 of your 1099-INT shows any foreign tax withheld on your bond interest.

The 3.8% Surtax for Higher Incomes

High-income investors face an additional 3.8% net investment income tax on both bond interest and capital gains from bond sales. The tax applies when your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, or $125,000 for married filing separately.¹⁹ The 3.8% hits the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. These thresholds are fixed by statute and don’t adjust for inflation, so more taxpayers cross them each year.

Mistakes That Trigger IRS Notices

The most frequent bond tax errors cluster around a few predictable situations:

Forgetting Line 2a for tax-exempt interest. The interest isn’t taxed, but it still must appear on your return, and the IRS receives a copy of your 1099-INT.
Missing the accrued interest adjustment after a mid-period purchase, which causes you to overpay on interest you didn’t actually earn.
Ignoring OID on zero-coupon bonds. Because no cash arrives, the annual accrual is easy to forget, but the IRS also gets a copy of Form 1099-OID.
Leaving basis blank for non-covered bonds, which lets the IRS treat the full sale price as gain.
Not amortizing premium on muni bonds, which is mandatory and affects your basis at sale or maturity.

The IRS imposes a 20% accuracy-related penalty on underpayments caused by a substantial understatement of tax. For individuals, that applies when you understate your tax by the greater of 10% of the correct tax or $5,000.²⁰ A paperwork mistake large enough to cross that line becomes a real financial hit.

Separately, if you fail to give your broker a correct taxpayer identification number, or if you have a history of underreporting interest, the IRS can require your broker to withhold 24% of future interest payments through backup withholding.²¹ You get credit for the withheld amount on your return, but your cash is tied up in the meantime.

1
Internal Revenue Service. Form 1099-INT
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Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
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Internal Revenue Service. Topic No. 403, Interest Received
4
Internal Revenue Service. 1040 (2025) Instructions
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Internal Revenue Service. Instructions for Form 1099-B (2026)
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Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. Publication 1212 (Rev. December 2014)
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Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
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Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
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Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) Instruments
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Office of the Law Revision Counsel. 26 U.S. Code 1276 – Disposition Gain Representing Accrued Market Discount Treated as Ordinary Income
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Office of the Law Revision Counsel. 26 U.S. Code 1278 – Definitions and Special Rules
14
Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium
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Office of the Law Revision Counsel. 26 U.S. Code 171 – Amortizable Bond Premium
16
TreasuryDirect. Tax Information for EE and I Savings Bonds
17
Internal Revenue Service. Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
18
Internal Revenue Service. Instructions for Form 1116
19
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
20
Internal Revenue Service. Accuracy-Related Penalty
21
Internal Revenue Service. Backup Withholding