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Scan for outdated or missing drivers - takes under a minuteDriver Scan →Repair Windows errors before they cause bigger problemsFix Now →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Not in every sense. U.S. Treasury bills have very low payment risk if you hold them to maturity: the U.S. Treasury promises to pay their face value. But that does not guarantee a positive return after inflation and federal tax, protect the price if you sell early, or lock in the rate on a bill you buy later.
What a Treasury bill promises
Treasury bills are short-term U.S. government securities with maturities of one year or less. They are sold at face value or at a discount, and the Treasury pays face value when a bill matures. The difference between the purchase price and face value is the bill’s interest; bills do not pay periodic coupons. TreasuryDirect explains that “When they mature, we pay you the face value.”
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That promise is about the nominal dollar amount paid at maturity. It is not a promise about what those dollars will buy, your after-tax return, or the amount you would receive if you sold before maturity.
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| Risk | What it means for a bill investor |
|---|---|
| U.S. government payment risk | The promised face-value payment at maturity is backed by the full faith and credit of the U.S. government, according to SEC Investor.gov. This is why bills are commonly treated as having very low credit risk, not zero risk in every investment sense. |
| Inflation risk | If prices rise faster than the bill’s return during the holding period, the return measured in purchasing power is negative before tax. Investor.gov notes that inflation reduces the purchasing power of a fixed return. |
| Tax impact | Interest is subject to federal income tax, reducing what you keep. State and local income taxes do not apply to Treasury interest. |
| Early-sale price risk | If you sell before maturity, the market price may be higher or lower than what you paid. The face-value payment applies at maturity, not to an early sale. |
| Reinvestment risk | If you use maturity proceeds to buy another bill, that is a new purchase at the rate then available. Future income can rise or fall as rates change. |
How inflation changes the return
To assess purchasing power, compare the bill’s nominal return over your holding period with inflation over that same period. If inflation is higher, your real return before tax is negative; federal tax can reduce the result further. A bill can therefore pay every dollar promised at maturity while still leaving you able to buy less with the proceeds.
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There is no single inflation-adjusted outcome for every bill: it depends on the bill’s return and inflation over the period you actually hold it. Avoid treating a quoted nominal yield as a guaranteed gain in purchasing power.
How Treasury bill taxes work
Treasury bill interest is federally taxable but exempt from state and local income taxes. For a bill purchased at a discount, the difference between the purchase price and face value is interest income. The IRS generally says that discount is reported when the bill is paid at maturity. See IRS Publication 550 (2025), Investment Income and Expenses, and TreasuryDirect’s tax information.
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So “tax-free” is misleading: the state and local income-tax exemption does not remove federal income tax. Tax reporting can depend on the transaction and the taxpayer’s circumstances; consult the current IRS guidance or a tax professional for an unusual situation. TreasuryDirect also notes that it does not provide tax advice.
What happens when a Treasury bill matures?
You can receive the maturity proceeds or, through TreasuryDirect, schedule a reinvestment into another bill of the same term. TreasuryDirect says a reinvestment can be scheduled with the original purchase or up to four business days before the original bill matures. If you bought through a bank or broker, check that provider’s procedures and available options. TreasuryDirect’s reinvestment guidance covers its service.
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A reinvestment is not an extension of the original bill at its original rate. It is a new purchase under the terms available then. If rates have fallen, the replacement bill may produce less income; if rates have risen, it may produce more. This uncertainty matters particularly if you rely on bills for continuing income or regularly roll short-term holdings forward.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to decide whether a bill fits your needs
Before buying, weigh the return against your cash needs and the risks that matter for your time horizon:
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- After-tax return: account for federal income tax rather than comparing only nominal yields.
- Purchasing power: consider inflation over the period you expect to hold the bill.
- Access date: match the maturity to when you need the money; an early sale can produce a different amount from the maturity payment.
- Holding plan: distinguish holding to maturity from selling early.
- Future rates: if you plan to reinvest, remember that each new bill has terms set at the time of that purchase.
Current auction yields, bank deposit terms, and broker-specific mechanics vary over time and are not compared here. Check the terms in effect for your intended purchase rather than assuming a past or advertised rate will remain available.
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