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 usually on your state return too, in the year the interest is credited or made available to you. That’s true whether you withdraw the interest, let it compound, or wait for the CD to mature.1Internal Revenue Service. Topic No. 403, Interest Received The principal you deposited is your own money coming back to you and isn’t taxed; only the interest is.
How the Tax Is Calculated
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%, but ordinary income is taxed at your full marginal rate, which runs from 10% to 37% for 2026. A CD paying 5% doesn’t net you 5% after tax. In the 24% bracket, the after-tax return on that interest is closer to 3.8%.
Most states with an income tax also tax CD interest. A handful of states have no income tax at all, but where a state does tax income, bank CD interest is generally on the list. U.S. Treasury interest is exempt from state and local income tax; no similar exemption exists for bank CDs.1Internal Revenue Service. Topic No. 403, Interest Received
When You Owe the Tax
For a CD with a term of one year or less, the timing is simple: you report the interest in the year the CD pays it 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 that matures in October 2026 generates taxable income for 2026.
Multi-year CDs are where people get tripped up. The IRS applies “constructive receipt,” meaning income counts as yours in the year you could have accessed it, even if you left it alone.3eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income If your three-year CD credits interest annually and lets you withdraw it without a substantial penalty, each year’s interest is taxable that year, not at maturity.
Deferred-Interest CDs and Original Issue Discount
Some multi-year CDs don’t pay out along the way. All the interest is rolled into the balance and paid in a lump sum at maturity. The IRS treats this deferred interest as original issue discount (OID), and you have to report a portion of it as income each year even though you haven’t received any cash.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Certificates of Deposit Your bank sends a Form 1099-OID each year showing the amount to include.5Internal Revenue Service. About Form 1099-OID, Original Issue Discount
This surprises people. You can owe several hundred dollars of tax on interest you can’t touch for another two years. If you later cash out the CD early for less than its full redemption price, you can deduct OID you reported in prior years but never actually received.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Certificates of Deposit
How to Tell Which Rule Applies to Your CD
Check your CD agreement for two things: how often interest is credited, and whether the bank imposes a substantial penalty for early withdrawal of that interest. Interest credited annually and accessible without a major penalty is taxed each year under constructive receipt. Interest deferred until maturity on a CD longer than a year is covered by the OID rules, which also produce annual tax. There is no ordinary bank CD structure that legitimately defers the entire tax bill to maturity.
How to Report CD Interest
Your bank or credit union sends a Form 1099-INT for any year in which your CD earns $10 or more of interest. Box 1 shows the taxable interest.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID For a deferred-interest CD covered by the OID rules, you’ll get a Form 1099-OID instead, with the annual OID in Box 1.7Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Form 1099-OID
You put the interest on the taxable interest line of your Form 1040. If your total taxable interest and ordinary dividends for the year exceed $1,500, you also have to fill out Schedule B.8Internal Revenue Service. Instructions for Schedule B (Form 1040) One detail people miss: if your CD earns less than $10 and no 1099-INT arrives, the interest is still taxable. The $10 figure only controls whether the bank must send the form. You’re responsible for reporting all interest either way.
If You Break the CD Early, Deduct the Penalty
Cashing out before maturity triggers a penalty from the bank, usually a set number of months of interest. You can 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 you get it whether you itemize or take the standard deduction.
Your 1099-INT will show the full interest in Box 1 and the penalty in Box 2. Report the full interest as income and claim the penalty deduction separately on Schedule 1.10Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Interest Subject to Penalty for Early Withdrawal The result is that you’re only taxed on the interest you actually kept. A large penalty can even exceed the interest earned in the current year, producing a net deduction against other income.
The 3.8% Net Investment Income Tax for Higher Earners
Higher-income taxpayers owe an additional 3.8% surtax on CD interest through the Net Investment Income Tax. It applies when your modified adjusted gross income exceeds these 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 set by statute and aren’t indexed for inflation.
Backup Withholding
If you don’t give your bank a correct Social Security number or taxpayer identification number, the bank must withhold 24% of your interest and send it to the IRS.12Internal Revenue Service. Topic No. 307 – Backup Withholding The same thing happens if the IRS notifies the bank that you’ve underreported interest income in the past. The withheld amount shows up in Box 4 of your 1099-INT and functions as a credit against your total tax when you file. It’s not extra tax, but it is avoidable: confirm your TIN when opening a CD account and respond to any IRS notices about mismatched information.
CDs Held Inside a Retirement Account
A CD held inside a qualified retirement account is taxed based on the account, not the CD.
Traditional IRA
Interest on a CD in a Traditional IRA isn’t taxed as it accrues. You get no 1099-INT and you don’t report annual interest. Instead, the full amount is taxed as ordinary income when you take it out of the IRA.13Internal Revenue Service. Traditional IRAs
Roth IRA
A CD in a Roth IRA is the most tax-friendly setup. 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.14Internal Revenue Service. Roth IRAs
Watch Out for RMDs
Starting at age 73, you have to take required minimum distributions from a Traditional IRA each year.15Internal 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 to satisfy the RMD and pay the bank’s penalty. Some custodians waive CD penalties for RMD withdrawals; policies vary. Laddering maturity dates so one CD always comes due near your RMD date avoids the conflict. Roth IRAs don’t require distributions during the owner’s lifetime.
Situations That Change the Answer
A few common variations are worth flagging because the default rules above don’t fully cover them.
A CD in a child’s name. Interest on a child’s CD is subject to the kiddie tax. For 2026, the first $1,350 of a child’s unearned income is covered by the standard deduction, the next $1,350 is taxed at the child’s rate, and anything above $2,700 is taxed at the parent’s marginal rate. The rules apply to children under 18, 18-year-olds who don’t provide more than half their own support, and full-time students aged 19 through 23 in the same situation.16Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income
An inherited CD. Interest that accrued before the original owner’s death is income in respect of a decedent and belongs on the decedent’s final return or the estate’s return. Interest accruing after the date of death is taxable to the beneficiary or estate that inherits the CD. The principal itself passes without income tax. If you inherit a CD, check that the 1099-INT you receive covers only the post-death interest.
A CD at a foreign bank. The interest is taxable on your federal return the same as domestic CD interest, but you may have an extra reporting requirement. If the aggregate value of all your foreign financial accounts exceeds $10,000 at any point in the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with FinCEN by April 15.17Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts The threshold is aggregate, not per account: a $6,000 foreign CD plus a $5,000 foreign checking account triggers it. Penalties reach $10,000 per non-willful violation and the greater of $100,000 or 50% of the account balance for willful ones.18Internal Revenue Service. 4.26.16 Report of Foreign Bank and Financial Accounts (FBAR)