Public Debt Act of 1940 is an act enacted to increase the debt limit of the U.S. to provide for the Federal taxation of future issues of obligations of the U.S. and its instrumentalities. The act provides that income from an obligation by the U.S. was not exempt from normal income tax.
At first the federal government treated all interest and gain on its own obligations as tax exempt. The 1941 act changed this by making the difference between the purchase and redemption price for savings bonds taxable income. According to Section 4 of the act, interest upon, and gain from the sale or other disposition of, obligations issued on or after the effective date of the Act by the U.S. or any agency or instrumentality thereof shall not have any exemption, as such, and loss from the sale or other disposition of such obligations shall not have any special treatment, as such, under Federal Tax Acts.