"Tax exempt" is a general term that refers to a financial transaction that is not subject to taxation. For example, some charitable or philanthropic organizations qualify as non-profits under 26 U.S.C. section 501(c) (3). The capital and income of 501(c) (3) non-profits is tax exempt. Tax-exempt bonds offer another example. Interest earned from tax-exempt state and municipal bonds is exempt from federal income tax. Even if a transaction is "tax-exempt," it might have to be reported.