Are Treasury Bills Taxed?

Treasury bill earnings are taxed as interest on your federal return, and most states and cities don’t tax that interest.

Treasury bills (T-bills) are simple on paper: you buy one, you wait, you get paid. Taxes are where many people slip, mostly because a T-bill doesn’t pay a coupon. Your return comes from the gap between your purchase price and what you receive later.

This guide explains what gets taxed, when it hits your return, and how to read the forms you’ll get from TreasuryDirect or a brokerage.

Are Treasury Bills Taxed? Federal And State Rules

A T-bill’s return is generally taxable on your federal income tax return. State and city income taxes usually don’t apply to interest from U.S. Treasury obligations. IRS Topic No. 403 on interest received says Treasury interest is federally taxable and exempt from state and local income taxes, and TreasuryDirect’s tax forms and withholding page describes the same treatment for marketable Treasuries.

Why A T-bill Return Counts As Interest

T-bills are issued at a discount. You pay less than the face value, then you receive the face value at maturity. The difference is your earnings, and the IRS treats it as interest income.

If you bought a $10,000 bill for $9,850 and it matures at $10,000, the $150 is interest income for federal tax purposes. Publication 550 lists interest on U.S. Treasury obligations as taxable interest for federal income tax. IRS Publication 550 is the detailed reference.

What The State And Local Exemption Means In Real Life

On your federal return, Treasury interest gets reported like other interest. On your state return, you often subtract Treasury interest so you’re not taxed twice. Many state returns have a specific line for U.S. government obligations.

Two practical takeaways:

• Don’t skip reporting Treasury interest federally.
• Don’t forget to mark it as U.S. government interest for state purposes, when your state return asks.

Which Tax Form You’ll Usually Receive

The account you use shapes which form you see at tax time. The numbers can be identical, yet the box labels differ.

TreasuryDirect Reporting

TreasuryDirect often reports earnings on a Form 1099-INT. If you only bought T-bills and held them to maturity, the reporting is often a single line of interest for the year.

Brokerage Reporting

Brokerages may report T-bill income on Form 1099-INT, Form 1099-OID, or both. A 1099-OID shows original issue discount, which is another way to report discount-based interest. IRS “About Form 1099-OID” explains what the form is for and where to find its instructions.

How To Enter The Amounts

Most filers enter the interest as interest income. If your 1099 shows federal withholding, report the full interest, then claim the withholding as tax already paid.

Where Treasury Interest Lands On Your Return

On a federal Form 1040, taxable interest is reported in the interest income area. Some filers also complete Schedule B when their interest and ordinary dividends cross the IRS filing threshold or when they have certain types of accounts. Your tax software handles the mechanics once the 1099 numbers are entered, yet it still helps to know the destination: Treasury earnings end up in the same “interest income” bucket as bank interest.

That grouping matters for two reasons:

• It’s taxed at ordinary income rates, not the long-term capital gain rates.
• It can interact with other rules that use interest as part of income, such as phaseouts and surtaxes that depend on total income.

How To Claim The State Tax Break

States handle the exemption in different ways. Some start with your federal adjusted gross income, then ask for additions and subtractions. Others start with taxable income and work from there. Either way, your goal is the same: your state return should treat Treasury interest as exempt where state law allows it.

A simple workflow that works with most tax software:

1. Enter your 1099 forms on the federal side first.
2. When the state interview asks about U.S. government interest, enter the Treasury amount.
3. Review the state return summary and confirm there is a subtraction or adjustment tied to U.S. obligations.

If you have both Treasuries and other bond funds, don’t assume all “government” income is exempt at the state level. Many bond funds mix Treasury holdings with agency debt, corporate bonds, or repurchase agreements. Your year-end statement may include a “U.S. government obligations” breakdown to help you separate those pieces.

For state returns, you may need to separate Treasury interest from bank interest. Many tax apps ask a follow-up question like “U.S. government interest?” Answering that correctly is what applies the state and local exemption.

When T-bill Interest Hits Your Tax Year

T-bills don’t pay periodic interest. You still owe tax based on the year the interest is reported to you. This is where calendar-year tracking can feel off.

Held To Maturity

For many taxpayers, the interest is reported in the year the bill matures. If you buy and mature the bill inside the same calendar year, it’s all in that year. If you buy late in one year and it matures early in the next, the interest may land on the next year’s 1099.

Sold Before Maturity

Selling early turns your return into a mix of interest mechanics and market pricing. Your brokerage tax package usually breaks it into the pieces the IRS expects. Follow the package, line by line, even if the split feels odd at first glance.

Rolling Bills And Reinvesting

Rolling short bills can feel like one position, yet each maturity is its own taxable event. Interest is realized at each maturity, then you buy the next bill.

Before you go further, it helps to see how other Treasury products get taxed, since many investors hold more than one type.

Security Type	How The Return Is Paid	Tax Treatment Snapshot
Treasury bill (T-bill)	Discount, paid at maturity	Federal taxable interest; state and local exempt; often 1099-INT or 1099-OID
Treasury note	Coupon interest twice per year	Federal taxable interest; state and local exempt; usually 1099-INT
Treasury bond	Coupon interest twice per year	Federal taxable interest; state and local exempt; usually 1099-INT
TIPS	Coupon plus inflation adjustment	Federal taxable interest; state and local exempt; inflation adjustment can be taxable before maturity
Floating rate note (FRN)	Coupon that resets with short-term rates	Federal taxable interest; state and local exempt; usually 1099-INT
Series I savings bond	Accrues, paid at redemption	Federal taxable interest; state and local exempt; reporting timing depends on election and redemption
Series EE savings bond	Accrues, paid at redemption	Federal taxable interest; state and local exempt; reporting timing depends on election and redemption
Treasury STRIPS	Deep discount, paid at maturity	Federal taxable interest; state and local exempt; can create annual OID reporting

A Simple Way To Think About After-Tax Yield

If your state taxes bank interest, Treasuries can pull ahead on what you keep after tax. A basic comparison is enough for most decisions.

1. Estimate the dollars of interest you expect from each option.
2. Apply your marginal federal rate to both options.
3. Apply your state rate to the bank option only, if your state taxes it.
4. Compare the remaining dollars after tax.

This method won’t match your final return to the penny, yet it shows whether the state exemption changes the winner.

Situations Where People Misreport T-bills

Most returns are clean. The trouble spots show up when the holding account or transaction pattern changes.

T-bills Inside IRAs And 401(k)s

Inside a tax-deferred retirement account, you generally don’t report the bill’s interest each year on your personal return. The tax timing follows the retirement account rules for distributions.

Secondary-Market Purchases

Buying a bill from another investor can change how the return gets split between interest and price movement. Broker tax packages may include OID tables or premium notes. Read those pages. They’re written to map the numbers to your return.

Backup Withholding

If backup withholding applies, federal tax can be withheld from reported interest. You still report the full interest, then claim the withheld amount as a payment.

Scenario	What Gets Taxed Federally	What To Check
Held to maturity in taxable account	Discount interest	Does your 1099 match the bills that matured this year?
Sold before maturity	Interest lines plus any reported gain or loss	Follow the broker 1099 package breakdown for reporting lines.
Rolled at maturity into a new bill	Interest from each matured bill	Total interest may combine many maturities into one annual number.
Held inside IRA or 401(k)	Usually not reported annually on your return	Tax shows up when distributions occur.
Purchased on secondary market	Interest plus broker adjustments	Look for OID, acquisition premium, or market discount notes.
Backup withholding applied	Full interest, with withholding credited	Claim withholding as tax already paid on your return.

Clean Habits For Tax Time

If you want to keep this painless year after year, do these small checks.

• Save your year-end statements. They tell you what was reported and when.
• Separate Treasury interest for your state return. That’s where the state tax benefit is claimed.
• Keep notes when you sell early. Early sales are where the reporting splits can surprise you.

Final Takeaways

For most taxpayers, T-bills are taxed as federal interest income, and state and local income taxes usually don’t apply. Your main job is entering the 1099 amounts correctly and labeling Treasury interest so your state return treats it the right way.

If your 1099 package includes OID tables and the entries still don’t make sense after you read the notes, a tax pro can walk you through the boxes and the matching inputs in your filing system.