If you borrow money to purchase a Certificate of Deposit, how is the interest treated for tax purposes?

When you borrow money to purchase a Certificate of Deposit (CD), the interest received from the CD is considered taxable income. This means you must report the interest earned on the CD when filing your taxes, as it is treated as ordinary income.

On the other hand, the interest paid on the loan used to purchase the CD generally does not qualify as a deductible expense in most circumstances. This is because the loan is considered personal debt rather than debt used for investment. Therefore, while you benefit from the interest earned on the CD, it does come with a tax obligation that you must fulfill, and the loan interest does not provide a tax advantage.

In summary, the correct answer reflects the nature of both types of interest: the earnings from the CD are taxable, while the interest paid on the loan is usually not tax-deductible, making this treatment distinct and thus accurately represented in the answer selected.