What’s Your Cost Basis in a Savings Bond? (w/Examples) + FAQs

This article reflects federal rules and state rules as of June 2026 and covers tax year 2025 (the return most people file in 2026), with 2026 figures noted where they apply. Tax law changes — confirm current figures before you file.

Quick Answer

Your cost basis in a U.S. savings bond is what you paid for it. For Series EE and I bonds, that is usually the purchase price you paid the Treasury. When you cash the bond, only the interest it earned is taxed as ordinary income on your federal return — never the principal. Savings bonds do not get a stepped-up basis at death.

When you redeem a Series EE or I bond, the part you originally paid is your basis and comes back to you tax-free, while every dollar of growth above that basis is taxable interest, not a capital gain. This matters most in two moments: the year you finally cash a bond after decades of growth, and the moment you inherit one and discover the IRS still expects tax on all that built-up interest.

Roughly $3 billion in matured U.S. savings bonds sit unredeemed and no longer earning a penny, according to the U.S. Treasury’s unclaimed-bond data. Many owners hold on because they fear a tax bill they do not understand — so let’s make the math plain.

Here is what you will learn:

💵 How to find your true cost basis for EE, I, E, and HH bonds — and why it is almost always the purchase price.
📜 Why inherited savings bonds get no step-up in basis, and the IRD trap that surprises heirs.
🧮 Three fully worked dollar-by-dollar examples you can copy for your own bonds.
🎓 How the education exclusion can drop your taxable interest to zero — and the income limits that kill it.
📋 Exactly which forms to file (1099-INT, Schedule B, Form 8815, Form 8949) and the deadlines that matter.

Cost Basis vs. Taxable Interest: What These Words Really Mean

“Cost basis” is the dollar figure the IRS uses to measure your profit. It is the amount you have already paid tax on, or the amount you put in with after-tax money. When you sell or redeem an asset, you subtract your basis from what you receive, and the difference is your taxable gain.

For a U.S. savings bond, the word “gain” is misleading. A savings bond does not trade on a market and does not rise and fall in price like a stock. Instead it accrues interest — the government adds earnings to the bond over time. So the difference between what you get back and what you paid is not a capital gain at all. It is interest income, taxed at your ordinary income rate.

This single distinction drives the whole article. A capital gain can get favorable tax rates and a step-up at death. Savings bond interest gets neither. The consequence of confusing the two is real money: a retiree who thinks a 30-year-old bond qualifies for the 15% long-term capital gains rate may owe tax at 22%, 24%, or higher instead.

Here is the plain-English rule, the consequence, and the fix:

What it is: Your basis is your purchase price; everything above it at redemption is taxable interest.
The consequence of getting it wrong: Reporting bond growth as a capital gain understates your tax and can trigger an IRS notice (CP2000) plus penalties and interest.
A quick example: Dana paid $5,000 for an I bond and cashes it for $8,200. Her basis is $5,000; her taxable interest is $3,200 — reported on Schedule B, not Schedule D.
A common misconception: “My bond doubled, so half is a tax-free return of capital.” No — only your original purchase price is tax-free.
What to do about it: When your Form 1099-INT arrives in January after you cash a bond, report the Box 3 figure as interest and keep your purchase records to prove your basis.

How Cost Basis Works for Each Type of Savings Bond

Not every savings bond is built the same way, and your basis depends on the series. The Treasury issues and tracks all of them through TreasuryDirect, and each series has its own basis quirk you should know before you cash anything.

Series EE Bonds

A Series EE bond is a government savings bond that earns a fixed interest rate and is guaranteed to at least double in value if you hold it 20 years. Your basis is the price you paid. Paper EE bonds bought before 2012 were sold at half their face value, so a “$100” paper bond cost you $50 — and $50 is your basis. Electronic EE bonds bought today are sold at face value, so a $100 electronic bond costs $100, and $100 is your basis.

The consequence of the half-face quirk is that older paper EE bonds show a much larger taxable interest figure than owners expect, because the bond grew from $50 toward $100 and beyond. A common misconception is that the face value printed on the bond is the basis — it is not. Always use what you paid. To confirm a paper bond’s value and accrued interest, use the Treasury’s savings bond calculator before you redeem.

Series I Bonds

A Series I bond is an inflation-protected savings bond whose rate combines a fixed rate with an inflation rate that resets every six months. For I bonds issued May 2026 through October 2026, the composite rate is 4.26%, built from a 0.90% fixed rate and a 3.34% annualized inflation rate. I bonds are always sold at face value, so your basis equals your purchase price — a $1,000 I bond costs $1,000.

Because I bonds track inflation, they can grow quickly, and that growth is all taxable interest at redemption. The fix is simple record-keeping: your TreasuryDirect account shows your exact purchase price, which is your basis, and the current value page shows the total, so the interest is the difference.

Series E Bonds (Legacy)

Series E bonds were the World War II–era savings bonds sold from 1941 to 1980, and every one of them has now stopped earning interest. Like old paper EE bonds, they were sold at a discount to face value, so your basis is the discounted price you paid. If you still hold a Series E bond, it is dead money earning nothing, and the entire accrued interest becomes taxable in the year you finally cash it.

The consequence of sitting on a matured E bond is a single large interest “bunch” in one tax year, which can push you into a higher bracket. What to do: cash matured E bonds and consider spreading redemptions across years if you hold several, to smooth the tax hit.

Series HH Bonds (Legacy)

Series HH bonds were “current-income” bonds that paid interest by direct deposit every six months rather than letting it accrue. Many HH bonds were obtained in exchange for E/EE bonds, and here lies a trap: an HH bond often carries deferred interest from the original E/EE bonds rolled into it. That deferred amount is printed on the bond and becomes taxable when the HH bond is redeemed or matures. The last HH bonds matured in 2024, so any HH bond you hold is now due. Your basis is generally the face value, but the deferred interest is taxed on top — so check the bond’s face for a “deferred interest” figure before you assume the redemption is tax-free.

The Big One: Inherited Savings Bonds Get No Step-Up

Here is the rule that costs heirs the most money: U.S. savings bonds do not receive a stepped-up basis at death. With most inherited assets — a house, stocks in a taxable brokerage account — the basis resets to the fair market value on the date of death, wiping out the gain that built up during the original owner’s life. Savings bond interest does not work that way.

The reason is a tax doctrine called Income in Respect of a Decedent (IRD), defined under Internal Revenue Code Section 691. IRD is income the deceased person earned but had not yet paid tax on at death — exactly like the deferred interest piled up inside an EE or I bond. Because that interest was never taxed during life, the law refuses to let it escape tax through a step-up. Whoever ends up reporting it — the estate or the heir — pays ordinary income tax on the full accrued interest.

The consequence is blunt: an heir who inherits a $10,000 bond that the parent bought for $5,000 will owe income tax on the $5,000 of interest, even though they “inherited” it. A common misconception is that inheritance makes the interest tax-free; it does not. What you can do is claim an IRD deduction for any federal estate tax that was paid on that same interest, which prevents true double taxation — but that deduction only helps if the estate was large enough to owe federal estate tax (over $13.99 million for 2025).

There is one planning lever for the final return. The executor may elect to report all the bond’s accrued interest on the decedent’s final income tax return instead of passing it to the heir. If the deceased was in a low bracket in their final year, this can shrink the total tax — but it is a one-time election, so weigh it before filing.

Which Situation Applies to You?

The right move depends entirely on who you are and why you are holding the bond. Find your situation below, then read the section that fits.

You bought the bond and still own it: Your basis is your purchase price; you owe tax on the interest only when you cash it or it matures. Jump to the worked examples.
You inherited the bond: No step-up — read the IRD section above, then decide who reports the interest.
You are the executor settling an estate: You choose whether the final return or the heir reports the interest, and you may owe estate tax that triggers an IRD deduction.
You are cashing a bond to pay for college: The education exclusion may zero out your tax — check the income limits below.
You co-own the bond with someone: The person whose funds bought it (or the surviving co-owner who cashes it) generally reports the interest.

Three Worked Examples (Copy the Math)

Numbers make this real. Each example uses the same logic: redemption value minus basis equals taxable interest, all reported as ordinary income for tax year 2025.

Example 1 — Cashing your own EE bond

Robert bought a paper Series EE bond in 1995 with a $5,000 face value. Because pre-2012 paper EE bonds sold at half face, he paid $2,500 — that is his basis. In 2025 he cashes it and the savings bond calculator shows it is worth $9,800.

Basis: $2,500
Redemption value: $9,800
Taxable interest: $9,800 − $2,500 = $7,300

Robert’s bank issues a 1099-INT showing $7,300 in Box 3. He reports it on Schedule B as interest. At a 22% federal rate, his tax is about $1,606 — and because savings bond interest is exempt from state tax, his home state takes nothing.

Example 2 — Inheriting an I bond with no step-up

Maria’s mother bought a $10,000 Series I bond for $10,000 in 2010 and never reported the interest. She dies in 2025, when the bond is worth $16,400, and Maria inherits it. There is no step-up.

Basis carried over: $10,000
Value when Maria cashes it in 2025: $16,400
Taxable interest (IRD): $16,400 − $10,000 = $6,400

Maria reports the full $6,400 as ordinary interest on her own return. The estate was small and owed no federal estate tax, so there is no IRD deduction to soften it. At her 24% rate, Maria owes about $1,536 — on money she “inherited.”

Example 3 — College cash-in using the education exclusion

Tom and Lisa (married filing jointly) cash $12,000 of Series I bonds in 2025 to pay their daughter’s $13,000 tuition bill. Of the $12,000, $4,000 is interest. Their MAGI is $140,000 — below the 2025 joint phase-out start of $149,250.

Total interest: $4,000
Qualified expenses ($13,000) exceed redemption proceeds ($12,000), so 100% of the interest can be excluded
Taxable interest after Form 8815 exclusion: $0

They file Form 8815 with their 1040 and exclude the entire $4,000, saving roughly $960 at a 24% rate.

Scenario Tables

These three situations cover most readers. Each links a choice to its tax result for tax year 2025.

When you cash your own bond

Your move	Tax result
Cash an EE/I bond you bought	Interest above your purchase price is taxed as ordinary income that year, per TreasuryDirect tax rules
Let a 30-year EE bond stop earning	Interest is taxable in the year of final maturity even if you do not cash it
Report interest annually (cash method election)	You pay small amounts each year, so little or nothing is taxable at redemption

When you inherit a bond

Your situation	Tax result
Inherit an EE/I bond from a parent	No step-up; you owe ordinary tax on all accrued interest as IRD under §691
Estate paid federal estate tax on the interest	You may claim an IRD deduction to avoid double tax
Executor reports interest on final 1040	The estate, not you, pays the tax — often at a lower rate

When you sell a marketable Treasury (not a savings bond)

Your move	Tax result
Sell a Treasury note bought at a discount	Gain may be part interest (accrued market discount) and part capital gain, reported on Form 8949 and Schedule D
Sell a Treasury bought at a premium	You may amortize the premium to reduce taxable interest, lowering your basis over time
Hold to maturity	You receive face value; any original-issue discount is taxed as interest as it accrues

Marketable Treasury and Other Bonds: A Different Basis World

Savings bonds and marketable bonds are cousins, not twins. A marketable bond — a Treasury note, corporate bond, or municipal bond — trades on the open market, has a fluctuating price, and can produce a true capital gain or loss. Your basis there is what you paid, but it adjusts for premium, discount, and original issue discount (OID) over the life of the bond.

If you buy a bond below face value, the difference is market discount, and when you sell or it matures, that discount is generally taxed as ordinary interest, not capital gain. If you buy above face value, you pay a premium, which you may amortize to gradually reduce both your taxable interest and your basis. These adjustments are explained in IRS Publication 550, and they are reported on Form 8949 and Schedule D when you sell — a different path entirely from the savings-bond Schedule B route.

The consequence of mixing these up is a misreported return. A reader who sells a discounted corporate bond and reports the whole gain as capital gain may underpay, because part of it is ordinary interest. The fix: read the Form 8949 instructions and check your broker’s 1099-B, which now reports basis for “covered” securities.

Forms, Lines, and Deadlines

Knowing your basis is useless if you file it wrong. Here are the forms that turn your basis into a correct return, with where each goes and when it is due.

Form 1099-INT: The bank or TreasuryDirect issues this after you redeem a bond. Box 3 shows the taxable interest from U.S. savings bonds and Treasury obligations. You receive it by January 31 of the year after you cash the bond.
Schedule B (Form 1040): You list savings bond interest here when your total interest exceeds $1,500 for the year. This attaches to your Form 1040, due April 15, 2026 for tax year 2025.
Form 8815: Use this to claim the education exclusion and to figure the MAGI phase-out. It attaches to your 1040 — see the Form 8815 instructions.
Form 8949 and Schedule D: Use these only for marketable bonds you sell, never for redeeming a savings bond.
Decedent’s final Form 1040: The executor uses this if electing to report accrued interest on the deceased’s final return; it is due the normal filing deadline for that year.

Missing the April 15 deadline without an extension triggers a failure-to-file penalty of 5% of unpaid tax per month, up to 25%, per the IRS penalty rules. The fix is a free six-month extension on Form 4868 — but it extends time to file, not time to pay.

Federal vs. State Treatment

Federal and state rules split cleanly here, and the split usually works in your favor. Knowing it prevents you from overpaying your state.

Tax level	How savings bond interest is treated
Federal	Fully taxable as ordinary income in the year you redeem or the bond matures, per TreasuryDirect
State and local	Exempt — no state or local income tax on U.S. savings bond interest, in every state

This state exemption is a federal protection that applies even in high-tax states. A New York or California resident pays the same federal interest tax as a Texas or Florida resident, but owes their state nothing on the bond interest. The practical lesson: if tax software or a preparer adds your bond interest to your state taxable income, that is an error to catch before you file.

Mistakes to Avoid

Each of these errors carries a real cost. Watch for them before you cash or inherit a bond.

Treating bond growth as a capital gain. You will underpay and risk a CP2000 notice plus interest, because savings bond growth is ordinary interest.
Using face value as your basis. Old paper EE bonds cost half their face, so this overstates your basis and understates tax — the IRS will correct it.
Assuming inherited bonds get a step-up. They do not; you will owe tax on decades of accrued interest you did not expect.
Forgetting HH bond deferred interest. That printed deferred amount is taxable at redemption, and skipping it underreports income.
Cashing many bonds in one year. Bunching interest can push you into a higher bracket and trigger higher Medicare premiums (IRMAA).
Missing the education exclusion income limit. Filing married-separately or exceeding the MAGI cap disqualifies you, so claiming it anyway invites an adjustment.
Ignoring final-maturity taxation. A 30-year EE bond is taxed at maturity even if you never cash it, so failing to report creates a silent underpayment.
Losing your purchase records. Without proof of what you paid, you cannot defend your basis if the IRS questions the return.

Do’s and Don’ts

These quick rules keep your basis math and your filing clean.

Do’s

Do keep purchase records — your basis defense lives in your TreasuryDirect history or paper bond.
Do use the Treasury calculator before redeeming, because it splits value into basis and interest.
Do consider annual reporting of interest for a child in a low bracket, so the final tax is small.
Do file Form 8815 the same year you cash bonds for tuition, since the exclusion is use-it-or-lose-it.
Do consult a CPA for an estate with savings bonds, because the IRD election can save real money.

Don’ts

Don’t report savings bond growth on Schedule D — it belongs on Schedule B as interest.
Don’t assume a step-up at death — savings bonds are IRD and carry the basis over.
Don’t cash everything at once unless you have modeled the bracket impact.
Don’t ignore matured bonds — they stop earning and the tax is still due at final maturity.
Don’t claim the education exclusion if you are married filing separately, because that status is barred.

Pros and Cons of Holding Savings Bonds for Tax Purposes

Understanding both sides helps you decide when to cash and when to wait.

Pros

Tax deferral — you can postpone all interest tax until redemption or final maturity, which lets the bond compound untaxed.
State tax exemption — interest is free of state and local income tax everywhere, a built-in savings.
Education exclusion — interest can be fully tax-free when used for qualified tuition under the income limits.
No market loss risk — your basis is never at risk because the bond never falls below its redemption value.
Simple reporting — one 1099-INT and a Schedule B line, far simpler than capital-gain tracking.

Cons

Ordinary rates, not capital gains — interest is taxed at your higher ordinary rate, with no preferential rate.
No step-up at death — heirs inherit the deferred tax through IRD.
Bunching risk — long-held bonds can dump a large interest figure into a single year.
No inflation indexing of the tax — you are taxed on nominal growth, including the inflation portion of I bonds.
Maturity forces taxation — you cannot defer forever; the bond’s final maturity ends the deferral.

What to Do Next

Follow these steps in order to handle your bond correctly this filing season.

Locate your bonds and records — log into TreasuryDirect for electronic bonds or gather paper certificates.
Run the savings bond calculator to confirm current value and how much is accrued interest.
Confirm your basis — for EE/I bonds it is your purchase price; for inherited bonds it carries over from the original owner.
Decide your timing — if you hold several bonds, spread redemptions across years to avoid bracket bunching.
Check the education exclusion if you are paying tuition, and prepare Form 8815.
Report the 1099-INT on Schedule B with your 1040 by April 15, 2026.
Call a CPA or estate attorney if you are an executor, the estate may owe estate tax, or the deferred interest exceeds a few thousand dollars — that help typically costs a few hundred dollars and can save far more.

This article is educational and is not a substitute for advice from a licensed tax professional for your specific situation. For inherited bonds, large redemptions, or estate decisions, a CPA or tax attorney is worth the fee.

FAQs

What is the cost basis of a savings bond?

Your purchase price. For Series EE and I bonds, your basis is what you paid the Treasury — often half the face value for older paper EE bonds. Everything above that at redemption is taxable interest for tax year 2025.

Do inherited savings bonds get a stepped-up basis?

No. Savings bonds are Income in Respect of a Decedent under IRC §691, so the basis carries over and the heir owes ordinary income tax on all accrued interest. There is no date-of-death step-up.

Is savings bond interest a capital gain?

No. It is ordinary interest income, reported on Schedule B and taxed at your regular rate. Savings bonds do not trade on a market and cannot produce a capital gain or loss.

Do I pay state tax on savings bond interest?

No. U.S. savings bond interest is exempt from state and local income tax in every state, though it is fully taxable on your federal return.

How much of my savings bond is taxable?

Only the interest — the redemption value minus your purchase price. If you paid $2,500 and cash it for $9,800, then $7,300 is taxable for tax year 2025.

What are the 2025 income limits for the education exclusion?

$149,250 to $179,250 MAGI for joint filers and $99,500 to $114,500 for all others, per the phase-out figures. Above the top limit you cannot exclude any interest, and married-filing-separately is barred entirely.

When is savings bond interest taxed if I never cash the bond?

At final maturity. A Series EE bond reaches final maturity 30 years after issue, and the accrued interest becomes taxable that year even if you hold the bond and never redeem it.

Can I report savings bond interest every year instead of all at once?

Yes. You may elect the accrual method and report interest annually, which spreads the tax and is useful for a child in a low bracket. Once chosen, the election applies to all your bonds.

Who pays tax on an inherited savings bond?

The heir or the estate. If the executor elects to report it on the decedent’s final return, the estate pays; otherwise the heir reports the accrued interest as IRD when they cash the bond.

What form reports savings bond interest?

Form 1099-INT, Box 3. The bank or TreasuryDirect issues it by January 31, and you carry the amount to Schedule B with your Form 1040.

Are HH bonds taxed differently?

Partly. HH bonds paid interest semiannually, but many carry deferred interest from rolled-over E/EE bonds that becomes taxable at redemption. Check the deferred amount printed on the bond before cashing.

Can I avoid tax by gifting a savings bond?

No. Gifting or transferring a savings bond does not erase the deferred interest; the interest is taxed when the bond is reissued or redeemed, and reissuing into another name can trigger tax to the original owner.

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