Unless you're buying a bond at issue and holding it to maturity, the tax rules for bond proceeds can get complicated pretty quickly.

Who issued the bond?
What type of proceeds did the bond generate?
What was your purchase price?
Bonds purchased at "par"
Interest income
Category | Federal taxation | State taxation* |
---|---|---|
Corporate bonds | Taxable | Taxable |
Treasury bonds or notes | Taxable | Not taxable |
Municipal bonds† | Generally not taxable | Generally not taxable if the bond is from the state in which you reside |
Capital gain or loss
Category | Sold prior to maturity* | Held to maturity |
---|---|---|
Corporate bonds Treasury bonds or notes Municipal bonds† | You could realize a capital gain or loss, depending on whether you sold the bond for more or less than the cost basis. Note: This could result in a taxable capital gain even for municipal bonds. | You will not realize a capital gain or loss because the principal you receive is equal to the cost basis. |
Bonds purchased at a "premium"
Amortization of bond premium
Category | Required or elective | Effect on cost basis | Effect on taxes |
---|---|---|---|
Corporate bonds | Elective | If elected, the cost basis decreases as you recognize amortization. | If elected, your annual interest income is decreased as you recognize amortization. |
Treasury bonds or notes | Elective | If elected, the cost basis decreases as you recognize amortization. | If elected, your annual interest income is decreased as you recognize amortization. |
Municipal bonds* | Required | Cost basis decreases as you recognize amortization. | N/A |
Interest income
Category | Federal taxation | State taxation* |
---|---|---|
Corporate bonds | Taxable | Taxable |
Treasury bonds or notes | Taxable | Not taxable |
Municipal bonds† | Not taxable | Generally, not taxable if the bond is from the state in which you reside |
Capital gain or loss
Category | Sold prior to maturity* | Held to maturity |
---|---|---|
Corporate bonds Treasury bonds or notes Municipal bonds† | You could realize a capital gain or loss, depending on the sale price relative to the cost basis. Note: This could result in a taxable capital gain even for municipal bonds. | Without amortization: You will realize a capital loss because the cost basis of the bond will be higher than the principal returned. With amortization: You will not realize a capital gain or loss because the principal you receive is equal to the cost basis. |
Purchased at "discount"
1. Original Issue Discount (OID)
Accretion of bond discount*
Category | Required or elective | Effect on cost basis | Effect on taxes |
---|---|---|---|
Corporate bonds | Required | Cost basis increases as you recognize accretion. | Your annual interest income is increased as you recognize accretion. |
Treasury bonds or notes | Required | Cost basis increases as you recognize accretion. | Your annual interest income is increased as you recognize accretion. |
Municipal bonds† | Required | Cost basis increases as you recognize accretion. | N/A |
Interest income
Category | Federal taxation | State taxation* |
---|---|---|
Corporate bonds | Taxable | Taxable |
Treasury bonds or notes | Taxable | Not taxable |
Municipal bonds† | Not taxable | Generally, not taxable if the bond is from the state in which you reside |
Capital gain or loss
Category | Sold prior to maturity* | Held to maturity |
---|---|---|
Corporate bonds Treasury bonds or notes Municipal bonds† | You could realize a capital gain or loss, depending on the sale price relative to the cost basis. Note: This could result in a taxable capital gain even for municipal bonds. | You don't realize a capital gain or loss because the principal returned is equal to the cost basis. |
2. Market discount
Accretion of bond discount
Category | Required or elective | Effect on cost basis | Effect on taxes |
---|---|---|---|
Corporate bonds Treasury bonds or notes Municipal bonds* | Elective | If elected, the cost basis increases as you recognize accretion. | If elected, your annual interest income is increased as you recognize accretion. Note: This could result in taxable municipal bond income. |
Interest income
Category | Federal taxation | State taxation* |
---|---|---|
Corporate bonds | Taxable | Taxable |
Treasury bonds or notes | Taxable | Coupon payments aren't taxable; however, the discount could be taxable. |
Municipal bonds† | Coupon payments aren't taxable; however, the discount could be taxable. | Generally, not taxable if the bond is from the state in which you reside; however, the discount could be taxable. |
Capital gain or loss
Category | Sold prior to maturity* | Held to maturity |
---|---|---|
Corporate bonds Treasury bonds or notes Municipal bonds† | Any unrealized accretion could result in taxable ordinary income. In addition, you could realize a capital gain or loss depending on the sale price relative to the cost basis. Note: This could result in a taxable capital gain even for municipal bonds. | Without accretion: Any unrealized accretion could be treated as taxable ordinary income, even for municipal bonds. With accretion: You don't realize a capital gain or loss because the principal returned is equal to the cost basis. |