When buying brokerage CDs, it's a good idea to check on the tax implications that may be inherently different than of those issued directly from banking institutions. To take a look at what some of these differences might be, let's explore what brokerage CDs are as well as how you might be taxed for investing in them.
Brokerage CDs
Brokerage CDs are very similar to bank CDs in that they are typically FDIC insured and offer predetermined rates of return that are paid out at the end of a maturation period. However, there are also some features associated with purchasing a CD from a broker that makes the process unique. For one, brokers purchase CDs in large blocks from banking institutions then resell them to customers in smaller denominations. Taking this approach gives them a certain amount of power over their CDs, which in turn allows them to offer them at higher interest rates, as well as resell them so that customers can withdraw their funds before they reach maturity.
Taxes on CDs from Broker Firms
Another feature that may be slightly different is the taxes on CDs from broker firms. You'll find that interest income from brokerage CDs is subject to federal income tax, as well as state and local income tax if applicable which is very similar to the traditional CD. However, because you can withdraw your CD early from the brokerage, you may have to deal with the difference between the sale price and purchase price, which is treated as a capital gain or loss and is taxed. The only time that you don't have to worry about taxes is when the funds are held in a tax-deferred retirement account.
There's nothing better than understanding every aspect of the investments that you make including taxes on CDs from broker firms. So don't be left in the dark regarding your brokerage CDs. Understanding how they are taxed can save you money in the long-run.