Municipal bonds may be subject to capital gains taxes. If you sell a municipal bond for more than you paid for it, your capital gain from the bond sale is taxable. If the bond was held for more than one year, it is subject to long-term capital gains tax. If you held the bond for less than one year, it is subject to short-term capital gains tax.

State and local governments issue municipal bonds, sometimes called “munis,” to raise funds for projects such as infrastructure, roads, schools, or land acquisitions. Municipal bonds can be purchased individually or via mutual funds. If shares are owned in an actively managed municipal bond mutual fund, you are likely to be subject to annual short- and/or long-term capital gains taxes.

Interest income on municipal bonds is usually exempt from federal income tax and from state and/or local income taxes if you are a resident of the state or municipality issuing the bond. Therefore, at least historically, municipal bonds have been viewed as a tax haven for wealthy investors.

Some municipal bonds are private-activity bonds. These are issued to fund public/private projects, such as a sports stadium or airport terminal, and therefore benefit private companies. If you are subject to the alternative minimum tax (AMT), interest income from these bonds must be included in your taxable income. Municipal bond mutual funds can only be called tax-exempt or tax-free if they invest no more than 20% of their assets in private-activity bonds. Your mutual fund’s annual tax report will state what percentage of the fund is subject to the AMT.

You can learn more about municipal bonds and capital gains taxes on the TIAA-CREF Web site.