CD interest counts as ordinary income and is taxed at your regular tax rate

Interest you earn from a certificate of deposit (CD) is reported to the IRS on a Form 1099-INT, and you must include it on your tax return as ordinary income. This means it is taxed at the same rate as wages, salary, or other ordinary income — not at a lower capital gains rate. The bank or credit union that holds your CD sends you the 1099-INT by January 31 each year, showing how much interest you earned in the previous calendar year.

You report this interest on Schedule 1 (Form 1040), which feeds into your total income for the year. The IRS taxes it in the year you earned it, even if you did not withdraw the money. This applies whether your CD is at a bank, credit union, or brokerage firm.

Key Takeaways

  • CD interest is taxed as ordinary income at your full tax rate, not as a capital gain or at a reduced rate.
  • You receive a Form 1099-INT from your bank or credit union by January 31, showing the interest earned in the prior year.
  • You must report the interest on Schedule 1 of Form 1040, even if you did not withdraw the money from the CD.
  • The IRS taxes the interest in the year you earned it, following the accrual method, regardless of when you actually receive or spend it.

When you receive the Form 1099-INT and what it shows

Your bank or credit union mails or emails the Form 1099-INT by January 31 of the year after you earned the interest. For example, interest earned during 2024 appears on a 1099-INT you receive by January 31, 2025. The form shows the total interest paid or credited to your account during that calendar year.

If you have CDs at multiple institutions, you will receive a separate 1099-INT from each one. The IRS also receives a copy of every 1099-INT issued to you, so the interest must be reported on your tax return or the IRS will notice the discrepancy.

Some banks allow you to withdraw interest monthly or quarterly without touching the principal. Other CDs automatically reinvest the interest back into the CD. Either way, the full amount of interest earned during the year appears on the 1099-INT and must be reported.

How to report CD interest on your tax return

You report CD interest on Schedule 1 (Form 1040), line 1b, labeled "Interest." This line is part of your income section. If you earned less than $1,500 in total interest from all sources (savings accounts, CDs, bonds, and other interest-bearing accounts combined), you may be able to report it directly on Form 1040 instead, but Schedule 1 is the standard route.

Add up the interest from all your 1099-INTs and enter the total on Schedule 1, line 1b. Attach the 1099-INT forms to your return or keep them with your records — the IRS does not require you to mail them in, but you must have them if you are audited.

If you earned interest but did not receive a 1099-INT (for example, from a very small amount at a credit union that does not issue forms for amounts under a certain threshold), you still must report it. Write the amount on Schedule 1, line 1b, and note the source.

Why CD interest is not taxed as a capital gain

Capital gains are profits from selling an investment at a higher price than you paid for it. CD interest is not a gain on the sale of the CD itself — it is income paid to you for lending your money to the bank. The IRS treats this as ordinary income, the same category as a paycheck or self-employment earnings.

This matters because ordinary income tax rates are usually higher than long-term capital gains rates. If you are in the 24% tax bracket, you pay 24% on CD interest. A long-term capital gain in the same year might be taxed at 15% or 0%, depending on your total income. CD interest gets no preferential rate.

What happens if you withdraw money before the CD matures

If you cash out a CD before its maturity date, the bank charges an early withdrawal penalty. This penalty is a separate item and may appear on a second 1099-INT form or on the same form in a different box. You report the interest earned as ordinary income (as described above), and you may be able to deduct the penalty on your return.

The penalty itself is not income — it is a cost of withdrawing early. On Form 1040, you can deduct CD penalties on Schedule 1, line 21 (labeled "IRA distributions" but also used for CD penalties and similar adjustments). This reduces your taxable income by the amount of the penalty.

For example, if you earned $500 in CD interest and paid a $50 early withdrawal penalty, you report $500 as income and deduct $50, for a net effect of $450 added to your income.

Tax-advantaged accounts that hold CDs

If you hold a CD inside an IRA (traditional or Roth), a 401(k), or another tax-deferred account, the interest is not taxed in the year you earn it. Instead, it grows tax-free inside the account. You pay tax on withdrawals from a traditional IRA or 401(k) later, or you pay no tax on may have access to withdrawals from a Roth IRA.

CDs in regular taxable accounts (not retirement accounts) are always subject to the ordinary income tax on interest, as described in this article. If you are trying to reduce taxes on CD interest, moving the CD into an IRA or other tax-advantaged account is one option, though contribution limits and other rules explore.

Frequently Asked Questions

Do I have to report CD interest if the amount is very small?

Yes. The IRS requires you to report all interest income, regardless of amount. Some banks do not issue a 1099-INT for amounts under $10, but you are still required to report it on your return. If you do not receive a form, write the amount on Schedule 1, line 1b, and note the source.

What if my CD interest is in a joint account with my spouse?

Each spouse reports their share of the interest. If the account is held jointly with equal ownership, each spouse reports half. The bank may issue one 1099-INT in one person's name, so you will need to split the amount between you and each report your share on your own return.

Can I deduct CD interest as a business expense?

No. CD interest is personal investment income, not a business expense. You report it as ordinary income, but you cannot deduct it. If you borrowed money to buy a CD, you cannot deduct the interest you paid on the loan either — the IRS does not allow deductions for investment interest in most cases.

Is CD interest taxed differently if I live in a state with income tax?

Federal tax and state tax are separate. You report CD interest on your federal return as described here, and you also report it on your state income tax return (if your state has income tax). The state tax rate varies by state, but the reporting method is the same.