With bond interest rates entering into the 4 and 5 percent territory, they’re becoming increasingly more attractive. A few years ago, investors chasing after yield had to take a risk on dividend-yielding equities – even if these securities were outside of their normal comfort zone. Thankfully, the resuscitation of bonds offers two incredibly valuable benefits to investors: guaranteed income and safety.

If you’re considering adding bonds to your taxable brokerage account through an ETF or mutual fund, then there are a few things you’ll want to know about the way they’re taxed.

• Capital gains (or losses) from the sale of the asset. Similar to other ETFs and stocks, when you sell your shares of a bond fund, the difference in price will be a taxable event. Those held longer than one year will most likely qualify for the more favorable long-term capital gains rate while those sold sooner than one year won’t.
• Capital gains (or losses) within the fund itself. To achieve optimal returns, fund managers will regularly buy and sell securities. As these assets turnover within the fund itself, capital gets distributed back to the shareholders creating another taxable event. Therefore, these gains must also be reported on your income tax return, even if you haven’t sold the shares.
• Interest. Those sweet interest payments from bonds are typically taxed at the federal and state levels as ordinary income. However, if the bond fund is made up exclusively of U.S. Treasury bonds, then it may be exempt from state taxes. 
• Dividends. Even though some bond funds advertise a “dividend”, don’t confuse this with the dividends from stocks. Typically this is just another form of interest payments made back to the shareholders. Since they won’t be considered as “qualified” by the IRS, this means they’ll be taxed at the regular ordinary income rates.

If you’d prefer to buy individual bonds yourself, you have the ability to do this either through the government platform TreasuryDirect.gov or your brokerage. However, it may not be worth the hassle. Bond values tend to fluctuate as interest rates change, so unless you already know what you’re doing it can be difficult to navigate. If it were me, I’d just keep things simple and stick with an ETF or mutual fund.