Price appreciation (if any) on a bond — whether it is a corporate, government, or municipal bond — is taxable when the bond matures. Interest on municipal bonds is exempt from federal tax, but may be subject to state and local tax (depending on if you live in the state or locality doing the issuing). Interest on U.S. government bonds is exempt from tax at the state level, but taxable at the federal level. If you buy a bond from Fannie Mae or Ginnie Mae ( the quasi-government agencies that guarantee mortgages), then gains are taxable at the local, state, and federal level.
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