How Are Treasury Bills (T-Bills) Taxed? (2024)

Interest earned on all U.S. Treasury securities, including Treasury bills (T-Bills), is exempt from taxation at the state and local level but is fully taxable at the federal level. At the end of each tax year or early in the next (by Jan. 31), owners of Treasury bills should receive a Form 1099-INT from the Dept. of the Treasury. This form details how much interest was earned on government securities for the year—information that is also filed with the Internal Revenue Service (IRS).

Key Takeaways

  • Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes.
  • The interest income received in a year is recorded on Form 1099-INT.
  • Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
  • If you live in a state with high local taxes, T-bills might be more advantageous than other short-term fixed instruments, like CDs.

Understanding Treasury Bills (T-Bills)

But first, a quick recap of the asset. Treasury bills are short-term debt obligations that are fully backed by the faith and credit of the U.S. government. They are sold in denominations of $100 up to $5 million. T-bill maturity durations are all less than one calendar year. Common maturity durations are one month, three months (13 weeks), or six months (26 weeks).

Like all Treasury securities, T-bills are considered to be risk-free assets. The likelihood of the U.S. government defaulting on debt obligations is incredibly low, given its ability to tax and print money and, of course, the general strength and reputation of the U.S.

It was this reputation for safety that, during the 2007-2008 financial crisis, caused investors to flock to Treasury securities as losses in stocks and other assets in their portfolios mounted. Those who had already invested heavily in Treasury securities prior to the crisis did successfully safeguard their capital.

Tax Rate of Treasury Bills

The interest earned by a T-bill is taxable as investment income in the year the bill matures. It must be reported on your federal tax return, Form 1040, and is taxed at the investor's marginal tax rate.

Even if you don't receive a Form 1099-INT for some reason, you are responsible for reporting the interest income generated by your T-bills and paying taxes on that amount.

If you buy a T-bill at a discounted price and then sell it at a premium price, that profit might also be taxable as a capital gain.

The federal tax burden can be eased through automatic tax withholding. Investors who own Treasury bills can opt to have up to 50% of their interest earnings automatically withheld; the exact percentage can be specified through any retail securities site. The Treasury automatically transfers the withholdings to the U.S. Internal Revenue Service (IRS) and reports the amount that is withheld on the 1099-INT form.

Tax Advantages of T-Bills

Although T-bills don't pay the highest interest rate (the tradeoff for being so low-risk), their exemption from state and local taxes can give them an advantage over other short-term, fixed-income assets, such as certificates of deposit (CDs)—especially for investors living in high-income-tax states, such as California, Massachusetts, New York, and Oregon. CDs are fully taxable.

To compare the interest rate from a CD with the rate from a Treasury bill and see which works out better tax-wise, you have to calculate the after-tax yields for both investments.

As an example, say that you are a single taxpayer in New York with an income of $100,000 per year, and the one-year Treasury bill you are looking at yields 0.07% (as it is as of April 21, 2021). The federal tax rate for your income level is 24%, and the state income tax rate is 6.33%.

After federal taxes, your net earnings from the Treasury bill will be only 0.053%, or 0.07% x (100% - 24%). But the tax rate on the CD is higher since it also includes state taxes.

You would only keep 69.67% of the yields after taxes (100% - 24% - 6.33%). Divide 0.00053, the after-tax yield of the Treasury bill, by 0.7003 to get 0.00076, the equivalent yield for a certificate of deposit. A CD must therefore yield more than 0.076% to be a better deal than the Treasury at your income level.

Correction—June 9, 2022: An earlier version of this article incorrectly calculated the equivalent yields between Treasuries and CDs.

How Are Treasury Bills (T-Bills) Taxed? (2024)


How Are Treasury Bills (T-Bills) Taxed? ›

Key Takeaways

How much tax do you pay on T-bills? ›

T-Bill Tax Considerations

The interest income that you may receive from investing in a treasury bill is exempt from any state or local income taxes, regardless of the state where you file your taxes. However, you will need to report interest income from these investments on your federal tax return.

Do you pay capital gains tax on T-bills? ›

When short term T bills mature, the interest income is mistakenly shown as capital gains in tax reports. The interest is taxable on Fed, tax exempt on most states. T bills are short term zero coupon purchased at a discount and paid at face vale at maturity.

What happens if you sell a treasury bill before it matures? ›

Treasury bonds, notes, and bills have no default risk since the U.S. government guarantees them. Investors will receive the bond's face value if they hold it to maturity. However, if sold before maturity, your gain or loss depends on the difference between the initial price and what you sold the Treasury for.

How much does a $1000 T-bill cost? ›

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

How are 6 month T-bills taxed? ›

Key Takeaways. Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.

What happens after T-bill matures? ›

Upon maturity of the T-bills, when will I receive the principal amount? On maturity, the principal amount will be credited to your respective account by the end of the day, typically after 6pm. For cash applications: The principal amount will be credited to your designated Direct Crediting Service bank account.

How do you avoid tax on Treasury bonds? ›

The Treasury gives you two options:
  1. Report interest each year and pay taxes on it annually.
  2. Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
Dec 12, 2023

Which is better Treasury bills or notes? ›

Bonds typically mature in 20-30 years and offer investors the highest interest payments to maturity. T-notes mature anywhere between two and 10 years, with bi-annual interest payments, while T-bills have the shortest maturity terms—from four weeks to a year.

Are federal T-bills tax free? ›

A Treasury bill—also called a T-bill—is a short-term debt obligation (essentially a short-term loan) issued by the federal government. These bills mature in one year or less from the date of purchase.

What's the catch with T-bills? ›

As a result, T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.

Can you lose money investing in Treasury bills? ›

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

How much can you make on a 3 month Treasury bill? ›

Basic Info. 3 Month Treasury Rate is at 5.45%, compared to 5.45% the previous market day and 5.21% last year. This is higher than the long term average of 2.70%.

Can I buy a T-Bill at a bank? ›

You can buy (bid for) Treasury marketable securities through: your TreasuryDirect account — non-competitive bids only. a bank, broker, or dealer — competitive and non-competitive bids.

How do Treasury bills work for dummies? ›

Treasury bills, or bills, are typically issued at a discount from the par amount (also called face value). For example, if you buy a $1,000 bill at a price per $100 of $99.986111, then you would pay $999.86 ($1,000 x . 99986111 = $999.86111). * When the bill matures, you would be paid its face value, $1,000.

What is the largest T-Bill you can buy? ›

T-bills sell in increments of $100 up to a maximum of $10 million, and you can buy them directly from the government through its TreasuryDirect website, or through a brokerage, bank or self-directed retirement account, like a Roth IRA.

Are Treasury bonds taxed as capital gains or ordinary income? ›

The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes.

How do you calculate income from T-bills? ›

To calculate yield, subtract the bill's purchase price from its face value and then divide the result by the bill's purchase price. Finally, multiply your answer by 100 to convert it to a percentage.

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