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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsFor U.S. individual taxpayers, Treasury bill interest is generally taxable on the federal income tax return but exempt from state and local income taxes. If you hold a bill until it matures, the discount between what you paid and its face value is generally treated as interest and reported when the bill is paid at maturity.
How Treasury bill interest is taxed
Treasury bills are direct obligations of the U.S. government. They are generally sold at a discount: you pay less than the bill’s face value and receive the face value at maturity. For a bill held through maturity, the difference is generally interest income, not a capital gain. The IRS says this income is generally reported for the year the bill is paid at maturity. See IRS Publication 550.
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| Tax level | General treatment of T-bill interest |
|---|---|
| Federal | Taxable as interest income. |
| State and local | Exempt from state and local income taxes under the general IRS rule. |
The IRS states that interest from Treasury bills, notes, and bonds is subject to federal income tax but exempt from all state and local income taxes. This general rule is about Treasury securities themselves; do not automatically apply it to a money market fund or bond fund that holds Treasury securities. For the official explanation, see Publication 550 and IRS Topic No. 403.
When and where to report the income
Bill held to maturity
If you hold the bill to maturity, the discount is generally reported as interest income when the bill is paid at maturity. Keep the purchase and maturity records so you can reconcile the amount reported by your broker or other payer.
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Information returns and federal return lines
Treasury bill interest should generally appear on Form 1099-INT, box 3. A broker may instead provide the details in a composite tax statement. If no information return arrives, the income remains reportable; a missing form does not make it tax-free. Compare any statement with your own transaction records. The IRS describes the reporting in Publication 550 and Topic No. 403.
For an individual federal return, the Schedule B instructions generally direct taxable interest reported on Forms 1099-INT or 1099-OID to line 1. Check the instructions for the return year you are filing, because form requirements and filing instructions can change. See the IRS Schedule B instructions.
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Special cases: premium purchases and short-term discount reporting
Buying a bill for more than face value
If you bought a bill for more than its face value, Publication 550 says the premium is generally reported as a section 171 deduction when the bill is paid at maturity. This is a specialized treatment, not a rule that automatically applies to every secondary-market purchase. Review the facts and applicable IRS guidance before calculating the deduction. See Publication 550.
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For certain short-term discount obligations redeemed at maturity, IRS Publication 1212 describes an information-reporting rule for cases where the owner’s purchase price cannot be established. The special T-bill rule uses the noncompetitive weighted-average accepted auction discount price for the longest-maturity T-bill that matures on the same date as the redeemed bill. This is a reporting rule, not a complete method for determining every investor’s tax result, basis, or gain or loss on a sale. See IRS Publication 1212.
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State returns and the limits of the general rule
The federal-source rule says T-bill interest is exempt from state and local income taxes, but states may differ in how they ask taxpayers to report or subtract exempt interest on their returns. Consult your state’s current instructions for the specific line or adjustment. The general exemption does not establish a particular state filing workflow.
This explanation covers the general U.S. individual-tax treatment of Treasury bills. Secondary-market sales, unusual or incomplete basis records, entities, and nonresident tax situations can require analysis beyond the basic maturity example.
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