Investing Tax Free

Municipal Bonds Tax

Municipal bonds are commonly referred to as tax exempt bonds because municipal bonds have many tax advantages. However, not all municipal bonds are tax free. In most cases, there are tax consequences in investing in municipal bonds.


The municipal bonds tax information in this section is based on the United States federal income tax laws as currently in effect and as currently interpreted and does not include any description of the tax laws of any foreign government that might apply to a beneficial owner. Prospective purchasers of municipal bonds should consult their own tax advisors concerning the application of federal and state tax laws to their particular situation.

Are municipal bonds tax free?

Some municipal bonds are tax free. However, for most municipal bonds, there are numerous federal and state tax consequences associated with the acquisition, ownership, and disposition of them.

List of municipal bonds tax topics
Municipal bond capital gains and losses

Even though municipal bonds interests are usually tax exempt, capital gains are not. Municipal bond investors need to report the capital gains of their municipal bond sales to the IRS.

Original Issue Discount or OID Tax rules apply to municipal bonds that were issued at discount in the initial municipal bond offerings.
Municipal bond premium Tax rules apply to municipal bonds that were bought at premium.
Market discount of municipal bonds Market discount of municipal bonds are not treated as tax exempt interests. Different tax rules apply.