How to Report 1099-B Redemption for CDs on Your Tax Return

Certificates of deposit (CDs) are typically low-risk investments, but tax reporting can become complex when they are redeemed and reported on a 1099-B form. Unlike standard interest income from CDs, which appears on Form 1099-INT, proceeds listed on a 1099-B require additional steps to determine the correct tax treatment.

Classification of Redemption Proceeds

The tax treatment of a redeemed CD depends on how it was purchased and whether it was sold before maturity. CDs bought directly from a bank and held to maturity generate interest income, reported on Form 1099-INT, while the principal is simply returned.

Brokered CDs—purchased and sold through brokerage firms—can be treated differently. If sold before maturity, the transaction may be reported on Form 1099-B, typically used for capital assets like stocks and bonds. While CDs are not traditionally considered securities, they can generate capital gains or losses when traded in the secondary market.

If a brokered CD sells for more than its purchase price, the difference is a capital gain. If sold for less, it results in a capital loss. The IRS classifies these as short-term (held for one year or less) or long-term (held for more than one year), affecting tax rates. Short-term gains are taxed as ordinary income, while long-term gains qualify for lower capital gains rates.

If a CD is called or redeemed early by the issuing bank, and it was originally purchased through a brokerage, the proceeds may still be reported on Form 1099-B. If the redemption amount exceeds the purchase price, the excess is a capital gain; if redeemed at a discount, it results in a capital loss.

Determining the Correct Cost Basis

Establishing the correct cost basis for a brokered CD sold before maturity is necessary for accurate tax reporting. The cost basis is the original purchase price, including any transaction fees or premiums. CDs bought at face value have a cost basis equal to the purchase price. Those purchased at a premium or discount require adjustments.

For CDs bought at a premium—where the purchase price exceeded face value—the IRS requires amortization of the excess amount over the holding period. This gradually reduces the cost basis and offsets taxable interest income each year. CDs purchased at a discount require accretion, where the discount is added to the basis over time. If the discount qualifies as a market discount (generally more than 0.25% per year of remaining maturity), the accretion may be taxed as ordinary income upon sale or redemption.

Brokerage firms typically provide cost basis information on Form 1099-B, but errors can occur, especially if a CD was transferred from another brokerage or acquired through multiple purchases. Investors should verify the reported basis using trade confirmations and account statements. If the brokerage does not track basis, the taxpayer must determine it manually.

Calculating Gains or Losses

To calculate the gain or loss from a CD’s sale or redemption, subtract the cost basis from the proceeds received. A positive difference is a gain; a negative difference is a loss.

The IRS classifies gains and losses based on the holding period. CDs held for one year or less before being sold are subject to short-term capital gains tax, which follows ordinary income tax rates ranging from 10% to 37% in 2024, depending on income. CDs held for more than a year qualify for long-term capital gains tax rates of 0%, 15%, or 20%, depending on taxable income.

Capital losses can offset capital gains from other investments. If total capital losses exceed gains, up to $3,000 can be deducted against ordinary income annually, with any remaining losses carried forward.

Accrued interest that has not yet been paid before the sale must be reported separately. Since interest income is taxed as ordinary income, any portion of the proceeds attributable to accrued interest cannot be included in the gain or loss calculation. Instead, this amount is reported as interest income.

Reporting on Official Tax Forms

Proceeds from the sale or early redemption of a brokered CD are typically reported on Form 1099-B, which brokers issue to both taxpayers and the IRS. This form provides details such as gross proceeds, sale date, and whether the transaction was short-term or long-term but does not always reflect adjustments like amortization of bond premiums or market discount accretion.

Transactions reported on Form 1099-B are entered on Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets). Form 8949 requires taxpayers to list each transaction separately, including the adjusted cost basis, proceeds, and any applicable codes explaining adjustments. If the brokerage-reported cost basis is incorrect or missing, taxpayers must adjust it manually and provide an explanation. The totals from Form 8949 are then transferred to Schedule D, where capital gains and losses are summarized before being reported on Form 1040.

Potential Adjustments for Certain Fees

Certain fees and costs associated with brokered CDs can affect the final tax treatment of a sale or redemption. These adjustments may not always be reflected on Form 1099-B, requiring taxpayers to make manual modifications.

Transaction fees, such as brokerage commissions or selling costs, reduce the net proceeds from a CD sale. If a brokerage charges a fee for facilitating the sale, this amount should be deducted from the gross proceeds when calculating the gain or loss. For example, if a CD sells for $10,000 but a $25 brokerage fee applies, the reportable proceeds should be adjusted to $9,975. These fees are typically included in the cost basis calculation when reported by the brokerage, but taxpayers should verify their accuracy on Form 1099-B.

Early withdrawal penalties may apply if a CD is redeemed before maturity, particularly for CDs purchased directly from a bank rather than through a brokerage. These penalties are reported separately on Form 1099-INT and can be deducted as an adjustment to income on Schedule 1 of Form 1040. Unlike capital losses, which have deductibility limits, early withdrawal penalties are fully deductible against ordinary income. Taxpayers should ensure they do not mistakenly include these penalties in their capital gain or loss calculations, as they are treated separately under IRS rules.