Credit unions are tax exempt because they are member-owned cooperatives with no outside shareholders and no profit motive, and Congress long ago decided that structure is fundamentally different from a for-profit bank. Every dollar a credit union earns has to flow back to its members through better loan rates, higher savings yields, or lower fees. There is no corporate profit going to outside investors, so there is nothing for the federal income tax to reach in the way it reaches a bank’s earnings. That is the whole answer, and the rest is how the law says it and what credit unions have to do to keep the exemption.
The Legal Basis for the Exemption
Two different sections of the Internal Revenue Code cover credit unions, depending on how the credit union is chartered.
Federal credit unions are exempt under IRC Section 501(c)(1), which covers organizations created by an Act of Congress that function as instrumentalities of the United States.1Internal Revenue Service. Other Tax-Exempt Organizations They were chartered under the Federal Credit Union Act of 1934, and a 1937 amendment made federal credit unions and their income exempt from all federal, state, and local taxation, except for taxes on real estate and tangible personal property. That provision, now codified at 12 U.S.C. ยง 1768, is still the law.2GovInfo. 12 USC 1768 – Taxation
State-chartered credit unions are exempt under IRC Section 501(c)(14)(A), which covers credit unions “without capital stock organized and operated for mutual purposes and without profit.”3Office of the Law Revision Counsel. 26 USC 501 – Exemption from Tax on Corporations, Certain Trusts, Etc They got their explicit federal income tax exemption in the Revenue Act of 1951.4Internal Revenue Service. Exempt Organizations Technical Guide – State-Chartered Credit Unions and Mutual Reserve Funds Unlike federal credit unions, state-chartered credit unions can still face state-level income or franchise taxes, because Section 501(c)(14) only addresses federal tax.
Both sections rest on the same idea: an organization that exists solely to pool resources for its members’ benefit, with no outside owners taking a return, is not the kind of entity the corporate income tax was written to reach.
What a Credit Union Has to Do to Keep the Exemption
The exemption is not automatic and it is not unconditional. A credit union has to keep operating like a cooperative. If the structure drifts, the exemption is at risk.
A Restricted Membership
A credit union cannot open its doors to anyone the way a bank can. Membership has to be tied to a defined common bond. The NCUA recognizes three types for federal credit unions: occupational (same employer or trade), associational (same church, professional group, or labor union), and community (living, working, worshiping, or attending school in the same geographic area).5National Credit Union Administration. Choose a Field of Membership A single credit union can hold a multiple common-bond charter and serve several groups.
These rules have loosened over the decades, especially for community charters that can now cover entire metropolitan areas. But the underlying limit is still legally binding.
No Profits Going Outside the Membership
A credit union has no external shareholders and cannot pay dividends to any. All surplus earnings have to go back to members through higher deposit rates, lower loan rates, reduced fees, or better services. This is what “without profit” means in the tax code. The institution can generate net income; that income just belongs to the members collectively, not to outside investors.
Democratic Governance
Every credit union member gets one vote regardless of account balance. A member with $500 on deposit has the same voice as one with $500,000. The board is elected by the membership and typically serves without pay. At a bank, voting power scales with share ownership, and directors are compensated professionals answering to shareholders. That difference in who controls the institution, and for whose benefit, is what the exemption is protecting.
The Taxes Credit Unions Still Pay
“Tax exempt” refers to federal income tax on net earnings from core operations. Credit unions pay plenty of other taxes.
- Payroll taxes on employee wages, including Social Security, Medicare, and federal unemployment.
- Property taxes on real estate: branches, headquarters, and land, at the same rates as any comparable commercial property.2GovInfo. 12 USC 1768 – Taxation
- Sales and excise taxes on operational purchases, from technology to office supplies.
- State-level franchise taxes, gross receipts taxes, or other levies on financial institutions, depending on the state.
There is also unrelated business income tax. If a credit union earns income from activities not substantially related to its exempt purpose, that income can be taxed. A credit union with $1,000 or more in gross unrelated business income has to file Form 990-T and pay tax on those earnings.6Internal Revenue Service. Unrelated Business Income Tax The exemption protects cooperative banking, not every activity the credit union happens to be involved in.
Why the Exemption Survives the “They Look Like Banks” Argument
Banks have argued for decades that the exemption is an unfair competitive advantage, especially now that some credit unions hold billions in assets and offer the same products as community banks. A commercial bank pays federal corporate income tax at 21% on net earnings, plus applicable state corporate taxes.3Office of the Law Revision Counsel. 26 USC 501 – Exemption from Tax on Corporations, Certain Trusts, Etc A credit union pays nothing on comparable earnings. From the banking industry’s perspective, a large credit union with open community membership looks like the bank down the street with a different tax bill.
The counterargument is that the exemption is doing exactly what it was designed to do. Because credit unions cannot pay outside shareholders, the earnings have to go back to members. That produces better rates, which puts competitive pressure on banks and benefits consumers on both sides. Congress has considered and rejected proposals to tax credit unions repeatedly, most recently declining to change the exemption in the 2025 tax reconciliation process. Nearly 145 million Americans belong to credit unions, and the cooperative structure is still legally distinct from a corporation no matter how large the institution grows.
What Members Pay on Their Own Accounts
The exemption belongs to the credit union, not to the people who bank there. Dividends on savings accounts and interest on certificates of deposit are taxable income to the individual member, reported the same way bank interest would be. Credit unions issue Form 1099-INT to any member who earns $10 or more in a year.7Internal Revenue Service. About Form 1099-INT, Interest Income A member who does not provide a valid taxpayer identification number can also be subject to backup withholding at the applicable federal rate.