Do you pay taxes on BND?
Tax on income
The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate. Bonds held for more than a year will be subject to potentially lower long-term capital gains rates.
Bond ETF interest payments are taxed as ordinary income.
But this money is taxable. Though often called "dividends," these interest payments aren't considered qualified dividends by the IRS, meaning they don't get the lower, qualified dividends tax rate.
Interest from corporate bonds and U.S. Treasury bonds interest is typically taxable at the federal level. U.S. Treasuries are exempt from state and local income taxes. Most interest income earned on municipal bonds is exempt from federal income taxes.
Municipal Bonds
Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.
Almost all bond ETFs are open-ended ETFs, though 17 are exchange-traded notes. Either way, you aren't taxed until you sell your shares. When you do, you owe capital gains tax on whatever profit you make. If you hold your shares for more than a year, you can use the lower long-term capital gains tax rate of 20 percent.
BND Dividend Information
BND has a dividend yield of 3.36% and paid $2.38 per share in the past year. The dividend is paid every month and the last ex-dividend date was Apr 1, 2024.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
Bonds are divided into two classes: taxable and tax-exempt. A bond's tax-exempt status applies only to the bond's interest income. Any capital gains generated from selling a bond or bond fund before its maturity date is taxable, regardless of the type of bond.
The easiest way to manage any form of capital gains tax is to hold your investments in a qualified retirement account. As a general rule, the IRS does not consider the sale or management of these assets a tax event until you make a withdrawal from the account.
Do bonds get reported to IRS?
Interest earnings on bonds are reported on IRS Form 1099-INT. It's important to keep in mind that savings bond interest is subject to more than one type of tax.
In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
If you bought the bond when it was issued at its original issue price and hold it until maturity, you generally will not recognize a capital gain (or loss). As a result, you likely won't incur any capital gains tax.
| Situation | Who owes the tax |
|---|---|
| You are the only owner of the bond | You owe the tax |
| You use your money to buy a bond that you put in your name with a co-owner | You owe the tax |
Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes. Government bonds such as Series HH bonds and Treasury Inflation-Protected Securities (TIPS) may also be tax-exempt. Interest earned on 529 plans is usually exempt from federal taxes.
- Fidelity Municipal Bond Index Fund (FMBIX)
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Vanguard Short-Term Tax-Exempt Bond ETF (VTES)
- Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
- iShares New York Muni Bond ETF (NYF)
- iShares California Muni Bond ETF (CMF)
- iShares National Muni Bond ETF (MUB)
For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.
Bond ladders and bond funds are the two most common ways to generate an income from bonds. In many cases, investors are best off purchasing bond funds since there is a lower minimum investment, instant diversification and no need for in-depth due diligence and ongoing portfolio maintenance.
Municipal bond ETFs hold securities, typically tax-advantaged bonds, issued by states and cities. You'll avoid federal taxes on these ETFs, but you'll escape state taxes on this ETF only if it invests exclusively in a state where you pay taxes.
In the last 30 Years, the Vanguard Total Bond Market (BND) ETF obtained a 4.30% compound annual return, with a 4.21% standard deviation. Discover new asset allocations in USD and EUR, in addition to the lazy portfolios on the website.
Why invest in BND?
The fund generally: Provides broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds. Offers relatively high potential for investment income; share value tends to rise and fall modestly.
| Q1 | Annual | |
|---|---|---|
| 2022 | -5.85 % | -13.11 % |
| 2021 | -3.64 % | -1.86 % |
| 2020 | +2.20 % | +7.71 % |
| 2019 | +2.98 % | +8.84 % |
ETFs are structured in a way that avoids taxable events for ETF shareholders. ETFs can avoid the wash sale rule because ETFs typically are an index for a sector or a group of stocks and are not "substantially identical" to a single stock.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
The simplest way to avoid this is to own mutual funds in tax-advantaged retirement accounts such as IRAs and 401(k)s. You can also make sure to hold the investments for the long term, so that if you do owe taxes, you'll pay them at the lower long-term capital gains rate.
