How is interest on a bond generally taxed?

Interest on a bond is generally considered taxable income. When a bond is purchased, the issuer pays interest to the bondholder, and this interest is typically subject to federal income tax. This taxation applies specifically to the individual who holds the bond, which means that the co-owner who purchased the bond is responsible for reporting and paying taxes on the interest income received.

In many cases, there can be nuances depending on the type of bond. For example, certain municipal bonds may be exempt from federal income tax, yet for the most common types of bonds, such as corporate or government bonds, the interest earned will be subject to income taxes, reinforcing the concept that the individual in possession of the bond at the time interest is earned will incur the tax liability.

The other choices present different scenarios that do not accurately reflect the general tax treatment of bond interest. Some may suggest tax exemptions or alternative tax rates which do not align with the principal taxation rules applicable to bond interest income.