How to Report Bond Income on Your Tax Return

Bond income is reported on your federal tax return in two separate places depending on what it is: interest payments go on Form 1099-INT (or Form 1099-OID for original issue discount bonds) and flow to your Form 1040, with Schedule B added when your total interest crosses $1,500; profits and losses from selling a bond before maturity go on Form 8949 and Schedule D. The wrinkles come from municipal bonds, savings bonds, accrued interest at purchase, and bonds bought at a discount or premium, each of which has its own rule.

Where Interest Income Gets Reported

Your broker or bank sends a Form 1099-INT each January summarizing what your bonds paid during the year. Box 1 shows total taxable interest, which covers corporate bond interest and U.S. Treasury interest.¹ This is ordinary income, taxed at your regular rate, and it goes on Form 1040.

If your total taxable interest from all sources exceeds $1,500 during the year, you must also file Schedule B, which lists each payer and the amount paid.² Below that threshold, no Schedule B is required, but the interest still gets reported on Form 1040.

One state-level point worth knowing: interest from U.S. Treasury securities is federally taxable but exempt from state and local income taxes.³ The federal return treats it as ordinary interest; your state return should back it out.

Tax-Exempt Municipal Bond Interest

Interest from municipal bonds is generally exempt from federal income tax, but the IRS still requires you to report it. Your broker reports the amount in Box 8 of Form 1099-INT, and you enter the total on Line 2a of Form 1040.⁴ Leaving it off is one of the more common triggers for IRS correspondence.

The reason the IRS cares about income it does not tax: your tax-exempt interest feeds into your modified adjusted gross income, which determines eligibility for various credits, deductions, and surtaxes. Omitting it can make your income look artificially lower and create problems downstream.

Savings Bonds: When You Report the Interest

Series EE and Series I savings bonds are different from most bonds because you choose when to report the interest. Most people defer until they cash the bond or it matures, at which point a 1099-INT arrives for all the accumulated interest. You can also elect to report the interest each year as it accrues, before receiving any cash.⁵

Annual reporting sometimes makes sense for bonds held in a child’s name, where the child’s lower bracket means little or no tax each year. If you switch from deferring to annual reporting, you must report 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 3115.⁵

Education Exclusion for EE and I Bonds

If you cash Series EE or Series I bonds issued after 1989 and use the proceeds for qualified higher education expenses, you may be able to 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.⁶

Income limits apply and adjust annually. For 2025 returns, the exclusion begins phasing out at $99,500 for single filers and $149,250 for married filing jointly, and disappears entirely at $114,500 and $179,250 respectively. Claim it on Form 8815, attached to your return.⁶

Reporting Bond Sales

When you sell a bond before maturity, you have a capital gain or loss equal to the difference between your sale proceeds and your adjusted basis (generally what you paid, modified for any premium or discount adjustments). Your broker reports proceeds in Box 1d of Form 1099-B and, for covered securities, reports cost basis in Box 1e.⁷ Enter each sale on Form 8949, and the totals carry to Schedule D of your Form 1040.⁸

Holding period determines the rate. Bonds held one year or less produce short-term gains, taxed at your ordinary income rate. Held more than a year, any gain qualifies for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.⁹ The bracket thresholds adjust annually for inflation.

Capital losses from bond sales offset capital gains dollar for dollar. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income per year, carrying any remainder forward.⁹

Accrued Interest Between Payment Dates

Bonds pay interest on a set schedule but change hands whenever the market is open. When you buy a bond between interest payment dates, you pay the seller the market price plus the interest that has built up since the last payment. That accrued interest needs to be handled correctly on both sides.

If you are the seller, the accrued interest you receive is ordinary interest income for the year of the sale. It is not part of the capital gain or loss calculation.¹⁰

If you are the buyer, you will eventually receive a full interest payment that includes the accrued period you already paid for. The 1099-INT will show the entire payment, overstating your actual income. Report the full 1099-INT amount on Schedule B, then subtract the accrued interest you paid with a line labeled “Accrued Interest.” You end up paying tax only on what you actually earned after the purchase date.¹⁰

Discount and Premium Bonds

Bonds bought above or below face value carry extra reporting rules. They exist to keep investors from converting what is essentially interest income into more favorably taxed capital gains.

Original Issue Discount

When a bond is first issued at a price below face value, the difference is called original issue discount. Zero-coupon bonds are the classic example: buy for $800, receive $1,000 at maturity, and the $200 difference is your interest. Even though no cash arrives until maturity, you must report a portion of the OID as ordinary interest income each year. The broker reports it in Box 1 of Form 1099-OID.¹¹ Any additional periodic interest the bond pays appears in Box 2 of the same form.

Each year’s OID accrual increases your bond’s tax basis, so you are not taxed twice on the same income when you eventually sell or redeem.

TIPS

Treasury Inflation-Protected Securities add a twist. The principal value adjusts upward with inflation, and the IRS treats that adjustment as OID you must report annually, even though you do not receive the increased principal until the bond matures. If deflation occurs and the adjustment is negative, you can use it to offset other interest income from the same bond.¹² This phantom income is the most complained-about aspect of holding TIPS in taxable accounts.

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 have to report the discount as income each year. The tax bill comes when you sell or redeem the bond: any gain up to the amount of the market discount is taxed as ordinary income rather than capital gain.¹³

For example, if you buy a bond for $9,500 (a $500 discount from its $10,000 face value) and later sell 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, which spreads the ordinary income recognition over time and increases basis each year.

A small discount gets a pass. If the discount is less than one-quarter of one percent of face value, multiplied by the complete years remaining until maturity at the time you bought it, the IRS treats the discount as zero.¹⁴ On a $10,000 bond with 10 years to maturity, the threshold is $250. Buy it for $9,800 and the $200 discount falls under the de minimis rule.

Bond Premium Amortization

When you pay more than face value for a taxable bond, you have a premium. Since you will only receive face value at maturity, the premium effectively reduces your yield. You can elect to amortize the premium, deducting a portion each year against the bond’s interest income. That lowers your annual tax on the bond’s interest and reduces your basis by the same amount.¹⁵

The election is sticky. Once you amortize on any taxable bond, the election applies to every taxable bond you own and every one you buy in the future. Revoking it requires IRS permission.¹⁵ If you choose not to amortize, you keep your full basis and recognize 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, the amortization does not reduce your reportable interest. It only reduces your basis in the bond.¹⁶

Covered Versus Non-Covered Bonds

This distinction matters a lot for bond sales. Debt instruments acquired on or after January 1, 2014, are generally classified as covered securities.¹⁷ For covered bonds, your broker must report both the proceeds and the adjusted cost basis to you and to the IRS on Form 1099-B. The January 1, 2011, date you may see referenced elsewhere applies to stocks, not bonds.

For non-covered bonds (those 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 adjusted basis yourself on Form 8949. If you leave the basis blank or enter zero, you get taxed on the entire sale price as if it were all gain. This is where older bonds can create surprisingly large and completely avoidable tax bills.

Even for covered securities, the broker’s reported basis may not account for everything. Brokers must adjust for OID accruals on covered bonds, but adjustments for premium amortization or market discount elections can be inconsistent. If you elected to amortize a premium or accrue market discount annually, verify that the broker’s basis matches your records. When it does not, report the correction using adjustment codes on Form 8949.

What Each 1099 Box Tells You

Knowing which boxes matter saves real time at filing:

Form 1099-INT: Box 1 is taxable interest. Box 6 is any foreign tax withheld. Box 8 is tax-exempt interest from municipal bonds.¹
Form 1099-OID: Box 1 is the year’s original issue discount. Box 2 is any other periodic interest paid on the same bond.¹¹
Form 1099-B: Box 1d is sale proceeds. Box 1e is cost basis for covered securities. Box 1g is any wash sale loss disallowed.⁷

Foreign Bond Interest

If you hold bonds issued by foreign governments or corporations, the interest is generally taxable on your U.S. return just like domestic bond interest. Many foreign countries withhold tax on interest payments before they reach you. To avoid being taxed twice, you can claim a foreign tax credit on Form 1116 for taxes withheld abroad.¹⁸ Foreign bond interest is passive category income for purposes of that credit.

If your 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. Your 1099-INT Box 6 shows the foreign tax withheld on your bond interest.

Common Reporting Mistakes

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

Forgetting to report tax-exempt interest on Line 2a. The interest is not taxed, but it still has to appear on the return, and the IRS receives its own copy of your 1099-INT.
Missing the accrued interest adjustment. Buyers who pay accrued interest at purchase and then report the full 1099-INT amount without subtracting it overpay their taxes.
Ignoring OID on zero-coupon bonds. Because no cash arrives, the annual accrual is easy to forget. The IRS still gets a copy of Form 1099-OID and expects to see it on your return.
Using the wrong basis for pre-2014 bonds. The IRS has no basis on file for non-covered bonds. If you do not supply it, you pay tax on the full proceeds.
Not amortizing premium on muni bonds. Unlike taxable bonds, this is not optional. Failing to reduce basis means overstating a loss or understating a gain when the bond matures or sells.

The IRS imposes a 20% accuracy-related penalty on underpayments caused by a substantial understatement of tax. For individuals, this applies when you understate tax by the greater of 10% of the correct tax or $5,000.¹⁹ A bond reporting error large enough to cross that line turns a paperwork mistake into real money.

Separately, if you fail to provide a correct taxpayer identification number to your broker, or if you have a history of underreporting interest, the IRS can require your broker to withhold 24% of all future interest payments through backup withholding.²⁰ 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
2
Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
3
Internal Revenue Service. Topic No. 403, Interest Received
4
Internal Revenue Service. 1040 (2025) Instructions
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TreasuryDirect. Tax Information for EE and I Savings Bonds
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Internal Revenue Service. Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
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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
10
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
11
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
13
Office of the Law Revision Counsel. 26 U.S. Code 1276 – Disposition Gain Representing Accrued Market Discount Treated as Ordinary Income
14
Office of the Law Revision Counsel. 26 U.S. Code 1278 – Definitions and Special Rules
15
Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium
16
Office of the Law Revision Counsel. 26 U.S. Code 171 – Amortizable Bond Premium
17
Internal Revenue Service. Publication 1212 (Rev. December 2014)
18
Internal Revenue Service. Instructions for Form 1116
19
Internal Revenue Service. Accuracy-Related Penalty
20
Internal Revenue Service. Backup Withholding