Taxable Interest—General: Investment Taxes (2025 IRS Guide)

This guide covers “Taxable Interest—General” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

This section discusses the tax treatment of different types of interest income.

In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Exceptions to this rule are discussed later.

Taxable Interest—General

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest.

Certain distributions commonly called dividends are actually interest. You must report as interest the so-called “dividends” on deposits or on share accounts in:

• Cooperative banks,

• Credit unions,

• Domestic building and loan associations,

• Domestic savings and loan associations,

• Federal savings and loan associations, and

• Mutual savings banks.

The “dividends” will be shown as interest income on Form 1099-INT.

Money market funds.

Money market funds are offered by non-bank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Certificates of deposit and other deferred interest accounts.

If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Interest subject to penalty for early withdrawal.

If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year without subtracting the penalty. See Penalty on early withdrawal of savings, later, for more information on how to report the interest and deduct the penalty.

Money borrowed to invest in certificate of deposit.

The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3.

Example.

You purchase a $10,000 certificate of deposit by borrowing $5,000 from the bank and adding an additional $5,000 of your funds. The certificate earned $575 at maturity in 2025, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2025 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2025. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit.

Gift for opening account.

If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, the value may be reported to you as interest income on Form 1099-INT and you may have to report it on your tax return.

For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.

Example.

You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator. If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. You must report $35 interest income on your tax return.

Interest on insurance dividends.

Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs.

Prepaid insurance premiums.

Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw.

U.S. obligations.

Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, and obligations issued by any agency or instrumentality of the United States is taxable for federal income tax purposes.

Interest on tax refunds.

Interest you receive on tax refunds is taxable income.

Interest on condemnation award.

If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable.

Installment sale payments.

If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Generally, that interest is taxable when you receive it. If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. See Unstated Interest and Original Issue Discount (OID) in Pub. 537.

Interest on annuity contract.

Accumulated interest on an annuity contract you sell before its maturity date is taxable.

Usurious interest.

Usurious interest is interest charged at an illegal rate. This is taxable as interest unless state law automatically changes it to a payment on the principal.

Interest income on frozen deposits.

Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because:

• The financial institution is, or may become, bankrupt or insolvent, or

• The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are, or may become, bankrupt or insolvent.

The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:

• The net amount you withdrew from these deposits during the year, and

• The amount you could have withdrawn at the end of the year (not reduced by any penalty for premature withdrawals of a time deposit).

See Frozen deposits if you receive a Form 1099–INT showing interest income on deposits that were frozen at the end of the tax year.

The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it.

Example.

$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but could not withdraw any more at the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include the $20 in your income for the year you can withdraw it.

Bonds traded flat.

If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. See Bonds Sold Between Interest Dates, later in this chapter.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 550 (2025), Investment Income and Expenses: Investment Income — Interest Income — Taxable Interest—General — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.