Interest income from a CD - Cash or Accrual accounting?
If I open a standard 1 year bank CD on 8/20/2025, and it matures on 8/19/2026, with interest paid *only* at maturity. The bank however compunds the interest monthly and "credits" it to the balance every month. But I will not actually receive any interest in hand until maturity. Contract is clear - if I close the CD on 5/8/2026, zero interest will be paid, and I'll only get principal back. So is income tax due on 4 mths of interest "credited" in 2025? Or is all 12 mth of interest taxed in 2026?
Quick Answer:
Under U.S. tax law, interest income from a CD is taxable in the year it is earned, regardless of when it's received. Even though you don't receive the interest until maturity, the interest is considered earned and credited to your account monthly. Therefore, you'll need to report the interest earned during 2025 (four months' worth) on your 2025 tax return, and the remaining interest earned in 2026 on your 2026 tax return. The bank's 1099-INT will reflect the interest earned in each year.
Note: This answer is provided for convenience only. It is important that you speak to a CPA about your individual tax situation.
