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This paper exploits a natural experiment from the late 1800s in which many US firms had inadvertently issued both taxable and tax-exempt bonds. Investors paid income tax on taxable bonds, but firms covered income tax on investors' behalf on tax-exempt bonds. Using a unique data-set of thesedual-class' corporate bonds, we derive a novel, market-based measure for tax risk, examine its time-series properties, and investigate if tax risk is priced in asset returns. We find that tax risk is pro-cyclical, is priced in the cross-section of asset returns, and commands a statistically and economically significant positive risk premium.