Tax Experts

Paying Tax on Savings Bonds

By Kevin McCormally, Editorial Director, Kiplinger.com

April 2, 2008

Q: If savings bonds are cashed in after one year, do they not come under long-term gains, such as stocks and mutual funds? -- J. McElroy

Kevin's Answer

No, savings bond interest is never considered a capital gain, no matter how long you own the bonds.

The tax break for the bonds is that the tax on the interest is deferred until you redeem the bonds (unless you opt to report the interest annually as it accrues). Still, when you get the interest it is interest, not capital gain, and thus taxed in your top tax bracket. (It is exempt from state taxes, though.)

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