According to the IRS, you must report your interest income on your tax return and pay taxes on it. This reduces your return on the investment, so it’s important to consider how CD interest is taxed in order to decide if placing your money in a CD is worth it.

How Does the IRS Tax Interest Earned on a CD?

Any interest that is earned on a CD during the tax year is considered income, and the IRS will tax it as such on your tax return.

If you earn more than $10 in interest, the banking institution holding your CD is required to send you a 1099-INT stating the amount of interest earned on the CD during the tax year. You will receive this document and pay taxes accordingly, even if you roll the principal of the CD into a new CD during the year. However, you do not have to pay taxes if the CD is held in a tax-advantaged retirement account.

In the event you don’t receive a 1099-INT from your banking institution, you still have to report it to the IRS on your tax return.

CDs With Terms of More Than One Year

If your CD has a term of more than one year, you will pay taxes on any interest earned in each year of the CD term. For example, if you have a three-year CD and you earn $15 in interest during the first year of the term, you will report $15 on your tax return as income. During the second year, if you earn another $15 in interest, you will again report $15 on your tax return as income and the same for the remaining year of the CD term. 

Exceptions to Paying Taxes on CD Interest

If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.

Of course, this is provided your annual contribution to the retirement account remains below the contribution limits set by the IRS. For 2023, the IRA contribution limit per individual is $6,500; if you’re age 50 or older, the limit is $7,500. For 2024, the limit is $7,000; if you're age 50 or older, the limit is $8,000.

The Bottom Line 

Simply put, yes, the IRS will tax all interest earned on your CD as ordinary income unless the CD is held in a tax-advantaged retirement account. This will be due for each tax year in which the interest is earned. So if you have a three-year CD, you will pay taxes only on the interest earned during the current tax year. If the CD is placed in a 401(k) or IRA account, taxes will be deferred until distributions are taken from those accounts. 

Correction—May 14, 2023: An earlier version of this article incorrectly stated that interest income is taxed if it exceeds $10. In fact, all interest income is taxable, unless it is held in a tax-advantaged retirement account.