Are Treasury Bills Taxable?
Treasury bills are taxable at the federal level, but they are fully exempt from state and local income taxes. At ModernWallet, we track how fixed-income yields translate into take-home cash, and the tax treatment of United States Treasury bills (T-bills) is one of their primary advantages over standard bank accounts. The difference between what you pay for a bill and what you receive at maturity is interest income. That interest is taxed as ordinary income on your federal return in the year the bill matures or is sold.
Because state and municipal governments cannot tax interest paid on federal debt obligations, investors living in high-tax jurisdictions keep a larger share of their earnings than they would with equivalent commercial bank products. Whether you purchase bills directly through TreasuryDirect or through a brokerage firm, your earnings are reported on Form 1099-INT.
Federal Income Tax and State Tax Exemption
Interest on United States Treasury bills, notes, and bonds is subject to federal income tax, but federal law bars state and local governments from taxing that income. The Internal Revenue Service (IRS) sets out both rules in Publication 550.
Your federal tax rate on T-bill interest matches your ordinary income tax bracket. Unlike long-term capital gains, which benefit from preferential federal rates, Treasury bill interest is taxed at the same rate applied to wages, salary, and standard bank interest. If your federal marginal rate is 24%, you pay 24% of your total T-bill interest to the IRS.
The state and local exemption applies everywhere in the country. In states that impose a personal income tax, you do not pay a single dollar of state tax on your Treasury bill interest. If your city or county levies a local income tax, T-bill interest is exempt from that local assessment as well. For a step-by-step walkthrough on acquiring these securities, see our guide on how to buy Treasury bills.
How Treasury Bill Interest Is Calculated
Treasury bills do not pay periodic coupon interest. Instead, the Treasury sells bills at a discount to their par value (also known as face value), and pays the full par value when the bill matures. The difference between the purchase price and the face value is your interest income.
Take a made-up example with round numbers that are not a real auction result. You bid for a $10,000 bill with a 26-week term. The auction sets the price at $9,800, so you pay $9,800 on the issue date. Twenty-six weeks later, the Treasury pays you $10,000. The $200 difference is your interest income.
Bills are available in maturities of 4, 6, 8, 13, 17, 26, and 52 weeks, with a minimum purchase amount of $100 and increments of $100. Regardless of the term length you select, your taxable interest is always the face value received at maturity minus the price you paid at issue.
Tax Timing Across Calendar Years and Maturity Dates
Treasury bill interest is generally taxed in the calendar year the bill matures. If you buy a 13-week bill in mid-November, it matures in February of the following year, and you owe no tax on it for the year you bought it. The entire interest payment lands on the tax return for the year in which the bill matures.
Automated reinvestment does not postpone this tax liability. If you schedule your matured bill proceeds to roll over into a new bill automatically, the IRS still considers the interest from the first bill to be received at maturity. You must report the full interest on each matured bill in the tax year that individual maturity occurs, even if every penny is immediately reinvested into a new security.
A specific timing rule applies to year-end maturities. According to TreasuryDirect guidelines on tax reporting, when a bill has a stated maturity date of December 31 that falls on a weekend or federal holiday, the cash payment is processed on the first business day of January. However, the interest is still reported on Form 1099-INT for the year ending on that December 31 maturity date.
The Accrual Election for Short-Term Obligations
Without an election, you report T-bill interest when the bill matures. IRS Publication 550 gives you another choice for short-term obligations, meaning debt that matures in a year or less. You can elect to include the discount in income as it accrues each year instead of all at maturity.
If you skip that election and sell a bill before it matures, part of your gain is taxed as ordinary income. That part equals your ratable share of the discount for the days you held the bill. The election covers all your short-term obligations, so talk to a tax professional before you make it.
Reporting on Form 1099-INT Box 3
Taxable Treasury interest is reported on Form 1099-INT. It does not appear in Box 1 alongside regular bank account interest. Instead, the IRS Form 1099-INT instructions specify that earnings from federal obligations belong in Box 3, labeled "Interest on U.S. Savings Bonds and Treasury Obligations."
If you hold your securities directly with the government, TreasuryDirect generates your tax form electronically in your online account. Find it under ManageDirect within the Manage My Taxes sub-menu. If you buy securities through an external brokerage account, such as Charles Schwab or Fidelity, that institution delivers a consolidated 1099 form showing your Box 3 earnings. Review our roundup of the best brokers for Treasury bonds to compare trading platforms.
On your state return, the Box 3 amount is interest your state cannot tax.
Comparing Treasury Bills to Bank Certificates of Deposit
State tax exemptions directly alter how Treasury bills compare to taxable bank savings vehicles. Commercial certificates of deposit and savings accounts generate interest that is fully taxable at both the federal and state levels.
Our guide outlines whether savings and CD interest is taxable. Banks report CD and savings interest in Box 1 of Form 1099-INT. Because of this difference, a T-bill paying a lower nominal yield than a bank CD can deliver a higher after-tax return for investors facing high state income taxes.
For an investor residing in a state with no individual income tax, such as Texas or Florida, the state tax exemption provides no added financial advantage.
Evaluate your choices across yield and liquidity. See our comparison of CDs vs Treasury bills as well as our guide to high-yield savings accounts vs CDs.
Tax Rules for Treasury Notes and Bonds
Treasury notes and bonds get the same treatment as bills: federal income tax applies, and state and local income taxes do not.
Under the TreasuryDirect marketable securities guide, Treasury notes mature in terms of 2, 3, 5, 7, or 10 years, while Treasury bonds mature in 20 or 30 years. Unlike bills sold at a discount, notes and bonds pay a fixed rate of interest every six months until maturity. You owe federal tax on each coupon payment in the calendar year you receive it, and your broker or TreasuryDirect reports those payments in Box 3 of Form 1099-INT. You can explore the full structural differences in our comparison of Treasury bills vs notes vs bonds.
Frequently asked questions
Do I pay state tax on Treasury bill interest?
No. Under federal statutory law, interest on Treasury bills, notes, and bonds is completely exempt from state and local income taxes in all 50 states. You only pay federal income tax on your earnings.
When do I pay tax on a T-bill?
You pay tax on a Treasury bill in the calendar year it matures or in the year you sell it. For example, if you buy a six-month bill in October that matures in April of the following year, the interest is reported on the tax return for that following year.
Do T-bills get a 1099-INT?
Yes. Your interest is reported on Form 1099-INT in Box 3, which is labeled "Interest on U.S. Savings Bonds and Treasury Obligations." TreasuryDirect provides this form in your online account, while private brokerage firms include it in their consolidated annual tax statements.
Are Treasury bills tax-free?
Treasury bills are not completely tax-free. They are fully taxable at the federal level as ordinary income. However, they are tax-free with respect to state, city, and county income taxes.
Is T-bill interest taxed as capital gains?
No. The discount between the purchase price and the face value at maturity is categorized as ordinary interest income by the IRS. If you sell a bill on the secondary market before maturity, your gain up to the ratable accrued discount is also taxed as ordinary income rather than a capital gain.
Are Treasury notes and bonds taxed the same way?
Yes, with respect to tax jurisdictions. Treasury notes and bonds are subject to federal income tax and exempt from state and local taxes. However, notes and bonds pay coupon interest every six months, so you report taxable income each year you receive a payment rather than waiting for final maturity.
Sources
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