General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

The tax-exempt status of interest on municipal bonds is determined by the Internal Revenue Service (IRS). The IRS provides the regulations and guidelines that define what qualifies as tax-exempt interest under the Internal Revenue Code. Generally, municipal bonds are issued by state and local governments, and the interest earned on these bonds is usually exempt from federal income tax, and sometimes from state and local taxes as well. However, this tax-exempt status is contingent upon the bonds being issued for qualifying purposes and adhering to specific federal regulations.

Bond counsel may provide legal opinions on the tax-exempt status, and while the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) oversee various aspects of securities issuance and trading, they do not determine tax status. Hence, the IRS plays a central role in this regard.