Taxable Interest: Investment Taxes (2025 IRS Guide)

This guide covers “Taxable Interest” 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

Interest you receive on an obligation issued by a state or local government generally is not taxable. The issuer should be able to tell you whether the interest is taxable, as well as give you a periodic (or year-end) statement showing the tax treatment of the obligation. If you invested in the obligation through a trust, a fund, or other organization, that organization should give you this information.

Taxable Interest

Interest on some state or local obligations is taxable.

Federally guaranteed bonds.

Interest on federally guaranteed state or local obligations issued after 1983 generally is taxable. This rule does not apply to interest on obligations guaranteed by the following U.S. government agencies.

• Bonneville Power Authority (if the guarantee was under the Northwest Power Act, in effect on July 18, 1984).

• Department of Veterans Affairs.

• Federal home loan banks. (The guarantee must be made after July 30, 2008, in connection with the original bond issue during the period beginning on July 30, 2008, and ending on December 31, 2010 (or a renewal or extension of a guarantee so made), and the bank must meet safety and soundness requirements.)

• Federal Home Loan Mortgage Corporation.

• Federal Housing Administration.

• Federal National Mortgage Association.

• Government National Mortgage Corporation.

• Resolution Funding Corporation.

• Student Loan Marketing Association.

Tax credit bonds.

Use Form 8912 to claim the credit for the following tax credit bonds.

• Clean Renewable Energy Bond (CREB).

• New Clean Renewable Energy Bond (NCREB).

• Qualified Energy Conservation Bond (QECB).

• Qualified Zone Academy Bond (QZAB).

• Qualified School Construction Bond (QSCB).

• Build America Bond (BAB).

Generally, in lieu of or in addition to, receiving periodic interest payments from the issuer, the holder of the bond is allowed an income tax credit. The credit compensates the holder for lending money to the issuer and functions as interest paid on the bond.

See the Instructions for Form 8912 for details and instructions.

Mortgage revenue bonds.

The proceeds of these bonds are used to finance mortgage loans for home buyers. Generally, interest on state or local government home mortgage bonds issued after April 24, 1979, is taxable unless the bonds are qualified mortgage bonds or qualified veterans' mortgage bonds.

Arbitrage bonds.

Interest on arbitrage bonds issued by state or local governments after October 9, 1969, is taxable. An arbitrage bond is a bond of which any portion of the proceeds is expected to be used to buy (or to replace funds used to buy) higher yielding investments. A bond is treated as an arbitrage bond if the issuer intentionally uses any part of the proceeds of the issue in this manner.

Private activity bonds.

Interest on a private activity bond that is not a qualified bond (defined below) is taxable. Generally, a private activity bond is part of a state or local government bond that meets both the following requirements.

1. More than 10% of the proceeds of the issue is to be used for a private business use.

2. More than 10% of the payment of the principal or interest is:

   1. Secured by an interest in property to be used for a private business use (or payments for this property), or

   2. Derived from payments for property (or borrowed money) used for a private business use.

Also, a bond generally is considered a private activity bond if the proceeds to be used to make or finance loans to persons other than government units is more than 5% of the proceeds or $5 million (whichever is less).

Qualified bond.

Interest on a private activity bond that is a qualified bond is tax exempt. A qualified bond is an exempt-facility bond (including an enterprise zone facility bond, a New York Liberty bond, a Midwestern disaster area bond, a Hurricane Ike disaster area bond, a Gulf Opportunity Zone bond treated as an exempt-facility bond, or any recovery zone facility bond), qualified student loan bond, qualified small issue bond (including a tribal manufacturing facility bond), qualified redevelopment bond, qualified mortgage bond (including a Gulf Opportunity Zone bond, a Midwestern disaster area bond, or a Hurricane Ike disaster area bond treated as a qualified mortgage bond), qualified veterans' mortgage bond, or qualified 501(c)(3) bond (a bond issued for the benefit of certain tax-exempt organizations).

Interest you receive on these tax-exempt bonds, if issued after August 7, 1986, generally is a “tax preference item” and may be subject to the AMT. See Form 6251 and its instructions for more information.

The interest on the following bonds is not a tax preference item and is not subject to the AMT.

• Qualified 501(c)(3) bonds.

• New York Liberty bonds.

• Gulf Opportunity Zone bonds.

• Midwestern disaster area bonds.

• Hurricane Ike disaster area bonds.

• Exempt facility bonds for qualified residential rental projects issued after July 30, 2008.

• Qualified mortgage bonds issued after July 30, 2008.

• Qualified veterans' mortgage bonds issued after July 30, 2008.

Qualified bonds issued in 2009 or 2010.

The interest on any qualified bond issued in 2009 or 2010 is not a tax preference item and is not subject to the AMT. For this purpose, a refunding bond (whether a current or advanced refunding) is treated as issued on the date the refunded bond was issued (or on the date the original bond was issued in the case of a series of refundings). However, this rule does not apply to any refunding bond issued to refund any qualified bond issued during 2004 through 2008 or after 2010.

Qualified bonds issued after December 31, 2010.

A portion of the interest on specified private activity bonds issued after December 31, 2010, may be a tax preference item subject to the AMT. The tax preference status will apply to the portion of the interest that remains after reducing it by deductions that would be allowed if the interest were taxable.

Enterprise zone facility bonds.

Interest on certain private activity bonds issued by a state or local government to finance a facility used in an empowerment zone or enterprise community is tax exempt.

New York Liberty bonds.

New York Liberty bonds are bonds issued after March 9, 2002, to finance the construction and rehabilitation of real property in the designated “Liberty Zone” of New York City. Interest on these bonds is tax exempt.

Market discount.

Market discount on a tax-exempt bond is not tax exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as taxable interest. See Market Discount Bonds, later. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable when you dispose of the bond.

For more information on the treatment of market discount when you dispose of a tax-exempt bond, see Discounted Debt Instruments, later.

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 — State or Local Government Obligations — Taxable Interest — 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.