Which is true about the interest on corporate bonds?

Question

It is tax deductible.

It is taxed as ordinary income.

It is taxed as a capital gain.

It does not incur taxes.

Answer 1

The correct statement regarding the interest on corporate bonds is:

It is taxed as ordinary income.

The interest earned on corporate bonds is considered ordinary income and is subject to federal and, potentially, state and local income taxes. It is not tax-deductible for the bondholder. Capital gains tax may apply if the bond is sold for more than its purchase price, but that is separate from the interest income itself.