The same rule applies even if you do not receive the interest – for example, if it is reinvested or accrued but not yet paid.ĬD interest is subject to federal income tax as well as state and local taxes in some cases. The interest earned on a CD is considered taxable income by the Internal Revenue Service (IRS) and must be reported on your federal income tax return. Here, we will take a closer look at how taxes work for CD interest and what you should know before investing. However, you may not be aware that the interest earned on CDs is subject to taxes. CDs are popular choices for people looking for a low-risk investment option that generates interest. As a responsible taxpayer, it’s important to be aware of the tax implications of your investments, including those related to Certificate of Deposits (CDs).