Yes, the interest you earn on a CD is taxable income

The interest a certificate of deposit earns is subject to federal income tax, and in most cases state income tax as well. The bank or credit union that holds your CD will report this interest to the IRS on a Form 1099-INT, and you'll report it on your tax return. You owe tax on the interest whether you withdraw it or let it stay in the account.

The tax is due in the year the interest is credited to your account, not when you withdraw the money. This matters because it means you may owe taxes on a CD even if you haven't touched the money yet — a situation that catches some people off guard, especially with longer-term CDs.

Key Takeaways

  • Interest earned on a CD is taxed as ordinary income at your federal tax rate, plus your state rate if your state has income tax.
  • The bank reports CD interest to the IRS on Form 1099-INT, which you receive by January 31 of the following year.
  • You owe tax on interest in the year it is credited, even if you do not withdraw the money until later.
  • CDs held in tax-advantaged accounts like IRAs or 401(k)s are not taxed until you withdraw the money, depending on the account type.
  • If you withdraw money before the CD matures, you may owe an early withdrawal penalty in addition to the taxes on the interest earned.

How the IRS treats CD interest

The IRS classifies CD interest as ordinary income, which means it is taxed at the same rate as your wages or salary. If you are in the 22% federal tax bracket, the interest on your CD is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The rate depends on your total income for the year, not on the CD itself.

Most states also tax CD interest as income. The exceptions are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, which have no state income tax. If you live in one of these states, you owe only federal tax on your CD interest. If you live elsewhere, you owe both federal and state tax.

Some states offer tax breaks for interest earned on CDs held by residents over a certain age — usually 59½ or 65 — but these are uncommon and vary widely. Check your state's tax authority website if you think you might may have access to.

When you receive the Form 1099-INT

Your bank or credit union will send you a Form 1099-INT by January 31 of the year after the interest is credited. This form shows the total interest your CD earned during the previous calendar year. You use this form to report the interest on your federal tax return (usually Form 1040) and your state return if required.

If you have multiple CDs at different institutions, you will receive a separate 1099-INT from each one. If you have multiple CDs at the same bank, they may combine the interest on a single form. The bank sends a copy to you and a copy to the IRS, so the IRS already knows about the interest before you file.

If the interest is less than $10, the bank may not be required to send a 1099-INT, but you still owe tax on it. Keep your own records of any interest earned, especially on smaller CDs.

CDs in retirement accounts are treated differently

If you hold a CD inside an IRA (traditional or Roth) or a 401(k), the interest is not taxed in the year it is earned. Instead, the tax is deferred until you withdraw the money. With a traditional IRA or 401(k), you pay income tax on the withdrawal. With a Roth IRA, withdrawals are tax-free if you meet the account rules.

This is one reason retirement accounts are useful for longer-term CDs: the interest compounds without being reduced by taxes each year. However, you cannot withdraw the money before age 59½ without paying a 10% early withdrawal penalty (with some exceptions), in addition to the income tax owed.

If you are not sure whether your CD is in a retirement account or a regular account, check your account statements or contact your bank. The account type will be clearly labeled.

What happens if you withdraw early

If you withdraw money from a CD before it matures, you typically owe an early withdrawal penalty in addition to the taxes on the interest. The penalty amount varies by bank and by the CD's term — a typical penalty might be three to six months of interest, but some banks charge more or less.

You still owe income tax on all the interest the CD earned, even if the penalty reduces the amount you actually receive. For example, if a CD earned $500 in interest and the penalty is $150, you owe tax on the full $500, not the $350 you received after the penalty.

The bank will report the gross interest (before the penalty) on your 1099-INT. The penalty itself is not deductible from your taxes, so you cannot reduce your taxable income by the amount of the penalty.

Planning around CD taxes

Because CD interest is taxed as ordinary income, it can push you into a higher tax bracket if you have other income. One strategy is to ladder your CDs — buy several CDs with different maturity dates so that only some of them mature and pay interest each year. This spreads the interest income across multiple years and may keep you in a lower bracket.

Another option is to hold longer-term CDs in a retirement account if you do not need the money right away. The tax deferral can add up significantly over time, especially on high-yield CDs.

If you are retired and living on a fixed income, be aware that CD interest counts toward your total income for the year. This can affect whether you owe taxes on Social Security benefits or whether you may have access to for certain tax deductions. A tax professional can help you plan around this.

Frequently Asked Questions

Do I owe taxes on CD interest if I reinvest it?

Yes. You owe tax on the interest in the year it is credited to your account, regardless of whether you withdraw it, spend it, or let it stay in the account to compound. The IRS taxes the interest based on when the bank credits it, not on what you do with it afterward.

What if my CD interest is less than $10?

You still owe tax on it, even if the bank does not send a 1099-INT. Keep your own records of the interest earned. If you have multiple small CDs, add up the total interest and report it on your return.

Can I deduct CD losses from my taxes?

No. If a CD loses value (which is rare and usually only happens with brokered CDs), you cannot deduct the loss. You can only deduct losses from investment securities like stocks and bonds, not from bank products.

Are high-yield CDs taxed differently than regular CDs?

No. High-yield CDs are taxed the same way as any other CD — the interest is ordinary income taxed at your federal and state rates. The higher interest rate does not change the tax treatment, only the amount of interest you owe tax on.

What if I move money from one CD to another before it matures?

If you withdraw from the first CD before maturity, you owe the early withdrawal penalty and taxes on the interest earned so far. When you put the money into a new CD, that new CD starts fresh — you only owe taxes on the interest the new CD earns going forward.