Find out how Treasury, agency, and municipal bonds are taxed by the federal, state, and local governments.
How government bonds are taxed

Points to know
- Bonds issued by federal governments may be exempt from state and local taxes.
- Bonds issued by state or local governments may be exempt from federal, state, or local taxes.
Taxation of federal government bonds
Income from bonds issued by the federal government and its agencies, including Treasury securities, is generally exempt from state and local taxes.
If you own a bond, mutual fund or ETF (exchange-traded fund), you'll need to calculate the amount of income you earned from the fund's government bond holdings (if any) in order to take advantage of this exemption when you file your taxes—it won't be reflected on the tax forms issued by your investment company.
Taxation of municipal bonds
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.1 Market discount for municipal bonds is taxable interest income and not tax-exempt interest income. You will, however, have to report this income when filing your taxes.
Municipal bond income is also usually free from state tax in the state where the bond was issued. However, keep in mind that:
- Some states do tax interest on their own bonds.
- Some states don't tax interest on municipal bonds from any state.
- Sometimes a state that usually taxes interest on municipal bonds will exempt specific bonds at the time it issues them.
Depending on the laws where you live, income from municipal bonds also may be exempt from local taxes. Talk to a tax advisor for more information about the rules in your state.
Private activity bonds
Private activity bonds are municipal bonds that are issued to raise money for a private project (as opposed to a project for the good of the public). These bonds are exempt from federal taxes under the regular income tax system, but subject to tax under the alternative minimum tax system.
If you invest in municipal bonds through a bond fund, income from private activity bonds, if any, will be reported to you in Box 11 of your 1099-DIV.