diff --git a/src/basic_memory/markdown/knowledge_writer.py b/src/basic_memory/markdown/knowledge_writer.py
index f169885a..0f492b8c 100644
--- a/src/basic_memory/markdown/knowledge_writer.py
+++ b/src/basic_memory/markdown/knowledge_writer.py
@@ -1,7 +1,7 @@
 """Writer for knowledge entity markdown files."""
 from typing import Optional
 
-from basic_memory.models import Entity as EntityModel
+from basic_memory.models import Entity as EntityModel, Observation
 
 
 class KnowledgeWriter:
@@ -25,6 +25,20 @@ class KnowledgeWriter:
             frontmatter.update(entity.entity_metadata)
         return frontmatter
 
+    async def format_observation(self, obs: Observation) -> str:
+        """Format a single observation with category, content, tags and context."""
+        line = f"- [{obs.category}] {obs.content}"
+
+        # Add tags if present
+        if obs.tags:
+            line += " " + " ".join(f"#{tag}" for tag in sorted(obs.tags))
+
+        # Add context if present    
+        if obs.context:
+            line += f" ({obs.context})"
+
+        return line
+    
     async def format_content(self, entity: EntityModel, content: Optional[str] = None) -> str:
         """Format entity content as markdown.
         
@@ -58,15 +72,12 @@ class KnowledgeWriter:
             sections.extend([
                 "## Observations",
                 "<!-- Format: - [category] Content text #tag1 #tag2 (optional context) -->",
-                "",  # Empty line after format comment
+                "",
             ])
-            
+
             for obs in entity.observations:
-                line = f"- [{obs.category}] {obs.content}"
-                if obs.context:
-                    line += f" ({obs.context})"
-                sections.append(line)
-            sections.append("")  # Empty line after observations
+                sections.append(await self.format_observation(obs))
+            sections.append("")
 
         # Add relations if present
         if entity.outgoing_relations:
diff --git a/src/basic_memory/models/knowledge.py b/src/basic_memory/models/knowledge.py
index e275c2dd..e542879b 100644
--- a/src/basic_memory/models/knowledge.py
+++ b/src/basic_memory/models/knowledge.py
@@ -121,6 +121,13 @@ class Observation(Base):
         server_default=ObservationCategory.NOTE.value,
     )
     context: Mapped[str] = mapped_column(Text, nullable=True)
+    tags: Mapped[Optional[list[str]]] = mapped_column(
+        JSON,
+        nullable=True,
+        default=list,
+        server_default='[]'
+    )
+    
     created_at: Mapped[datetime] = mapped_column(DateTime, server_default=text("CURRENT_TIMESTAMP"))
     updated_at: Mapped[datetime] = mapped_column(
         DateTime, server_default=text("CURRENT_TIMESTAMP"), onupdate=text("CURRENT_TIMESTAMP")
diff --git a/tests/markdown/test_knowledge_writer.py b/tests/markdown/test_knowledge_writer.py
index 1e44e066..44110181 100644
--- a/tests/markdown/test_knowledge_writer.py
+++ b/tests/markdown/test_knowledge_writer.py
@@ -148,9 +148,9 @@ async def test_format_content_preserves_spacing(
             # <!-- Format comment -->
             # <empty line>
             # - observation entries...
-            assert "<!--" in lines[i+1], "Missing format comment after Observations"
-            assert lines[i+2] == "", "Missing empty line after format comment"
-            assert lines[i+3].startswith("- "), "Should start observations after empty line"
+            assert "<!--" in lines[i + 1], "Missing format comment after Observations"
+            assert lines[i + 2] == "", "Missing empty line after format comment"
+            assert lines[i + 3].startswith("- "), "Should start observations after empty line"
 
         elif line == "## Relations":
             # Relations section should have format:
@@ -158,10 +158,11 @@ async def test_format_content_preserves_spacing(
             # <!-- Format comment -->
             # <empty line>
             # - relation entries...
-            assert "<!--" in lines[i+1], "Missing format comment after Relations"
-            assert lines[i+2] == "", "Missing empty line after format comment"
-            if i+3 < len(lines):  # If there are relations
-                assert lines[i+3].startswith("- "), "Should start relations after empty line"
+            assert "<!--" in lines[i + 1], "Missing format comment after Relations"
+            assert lines[i + 2] == "", "Missing empty line after format comment"
+            if i + 3 < len(lines):  # If there are relations
+                assert lines[i + 3].startswith("- "), "Should start relations after empty line"
+
 
 @pytest.mark.asyncio
 async def test_format_content_mixed(
@@ -172,19 +173,64 @@ async def test_format_content_mixed(
     """Test content with both raw content and structured data."""
     # Add observations to entity with relations
     entity_with_relations.observations = entity_with_observations.observations
-    
+
     # Test with raw content
     raw_content = "# Custom Title\n\nSome content."
     result = await knowledge_writer.format_content(entity_with_relations, raw_content)
-    
+
     # Should preserve raw content
     assert result == raw_content
     assert "# test_entity" not in result
-    
+
     # Test without raw content - should generate structured
     result = await knowledge_writer.format_content(entity_with_relations)
-    
+
     assert "## Observations" in result
     assert "## Relations" in result
     assert "- [tech] First observation" in result
-    assert "- connects_to [[target_entity]]" in result
\ No newline at end of file
+    assert "- connects_to [[target_entity]]" in result
+
+
+@pytest.mark.asyncio
+async def test_format_content_preserves_tags(
+    knowledge_writer: KnowledgeWriter, sample_entity: Entity
+):
+    """Test that observation tags are preserved in formatting."""
+    sample_entity.observations = [
+        Observation(
+            entity_id=1, category="tech", content="First observation", tags=["important", "bug"]
+        ),
+        Observation(
+            entity_id=1,
+            category="design",
+            content="Second observation",
+            tags=["feature"],
+            context="Some context",
+        ),
+        Observation(entity_id=1, category="note", content="Third observation without tags"),
+    ]
+
+    result = await knowledge_writer.format_content(sample_entity)
+
+    # Check that tags are formatted correctly
+    assert (
+        "- [tech] First observation #important #bug" in result
+        or "- [tech] First observation #bug #important" in result
+    )
+    assert "- [design] Second observation #feature (Some context)" in result
+    assert "- [note] Third observation without tags" in result
+
+    # Verify formatting with multiple elements
+    lines = result.split("\n")
+    obs_section = False
+    for line in lines:
+        if line == "## Observations":
+            obs_section = True
+            continue
+        if obs_section and line.startswith("- "):
+            if "First observation" in line:
+                # Tags should be space-separated and sorted
+                assert " #bug #important" in line
+            if "Second observation" in line:
+                # Tags should appear before context
+                assert "#feature (Some context)" in line