Do You Pay Taxes on Treasury Bills? What To Know

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Yes, Treasury bill earnings are subject to federal income tax, but they’re exempt from state and local income taxes. Instead of paying traditional interest, T-bills generate income through a built-in discount that the IRS treats as taxable interest. This structure makes T-bills especially attractive for investors in high-tax states or anyone seeking predictable, low-risk returns.

Here’s what to know about how Treasury bills work, how they’re taxed and how they compare with other conservative investments.

Key Takeaways on How Treasury Bills Are Taxed

• T-bill earnings are taxed as ordinary income at the federal level. Income is taxed at your marginal rate, not at capital gains rates.
• T-bill earnings are exempt from state and local income taxes. This exemption applies regardless of where you live.
• You don’t receive monthly interest payments. T-bills earn money through an Original Issue Discount (OID): you buy them below face value and receive full value at maturity.
• Income is reported on a 1099-INT or 1099-OID. Your brokerage or TreasuryDirect reports taxable income to both you and the IRS.
• Selling before maturity can change the tax outcome. Early sales introduce additional record-keeping and potential capital gain or loss considerations.

What Is a Treasury Bill and How Does It Earn Interest?

A Treasury bill, or T-bill, is a short-term debt security issued by the U.S. Department of the Treasury. Maturities typically range from four weeks to one year. Because they’re backed by the U.S. government, they’re widely considered one of the safest investments available.

You can buy Treasury bills directly through the federal government’s online platform, TreasuryDirect, or through brokerage firms and some banks. Minimum purchases are usually $100 in face value increments.

Unlike traditional bonds or savings accounts, T-bills do not pay periodic interest. Instead, they’re sold at a discount and mature at their full face value. The difference between what you pay and what you receive is your earnings.

From a tax standpoint, this matters because the IRS treats that built-in discount as interest income, not as a capital gain. Interest income is taxed at ordinary income rates, which can be higher than long-term capital gains rates for many investors.

How Original Issue Discount (OID) Works

Here’s a simple example:

• You buy a T-bill with a face value of $10,000 for $9,800.
• At maturity, you receive the full $10,000.
• The $200 difference represents your interest income.

Even though no cash interest was paid along the way, the IRS views that $200 as income you earned over the holding period. Economically, it’s no different than receiving interest — it’s simply embedded in the price, rather than paid out periodically.

How Treasury Bills Are Taxed at the Federal and State Level

The tax treatment for T-bills varies depending on the specific governmental entity.

Federal Income Tax Treatment

T-bill earnings are taxed as ordinary income at the federal level. That means your earnings are taxed at your marginal income tax rate, just like wages, interest earned from bank accounts or short-term bond income.

If you’re in the 22% federal tax bracket, for example, your T-bill earnings are generally taxed at 22%. The exact rate depends on your total taxable income for the year.

Your brokerage or TreasuryDirect automatically reports your taxable interest to the IRS, and you’ll receive a tax form showing the amount to include on your return.

State and Local Tax Exemption — Why It Matters

One of the biggest advantages of Treasury bills is that their earnings are exempt from state and local income taxes. This exemption applies nationwide because T-bills are federal government obligations.

For investors in high-tax states such as California, New York or New Jersey, this exemption can meaningfully improve after-tax returns compared with taxable alternatives like CDs or corporate bonds.

In practical terms, a T-bill with a slightly lower headline yield can still leave you with more net income after taxes once state taxes are eliminated. For conservative investors focused on cash preservation and predictability, that tax efficiency often matters more than chasing incremental yield.

How To Report Treasury Bill Income on Your Taxes

Reporting your T-bill income properly involves copying the right information from tax forms you receive. 

Which Tax Forms You’ll Receive

Most investors receive either a Form 1099-INT or Form 1099-OID reporting their T-bill income.

• 1099-INT is more common when T-bills are held in brokerage accounts and the discount is treated as interest.
• 1099-OID may appear when the original issue discount is tracked separately.

The reported income is sent to both you and the IRS automatically, usually by late January.

Where T-Bill Income Goes on Your Tax Return

Per IRS guidance, T-bill income typically flows onto Schedule B, if required, and then to Line 2b of Form 1040 as taxable interest income.

Two issues commonly surprise taxpayers:

• You may owe tax even if you didn’t receive cash during the year. If the T-bill matured late in the year or OID was recognized, the income may still appear on your tax form.
• Small amounts still matter. Even modest interest amounts are reportable and must be reported accurately. 

Brokerages usually handle the calculations correctly, but it’s still wise to verify the numbers against your own records.

What Happens if You Sell a Treasury Bill Before Maturity?

Selling a Treasury bill could potentially introduce income in the form of capital gains to your transaction. 

Tax Treatment When Selling on the Secondary Market

You can sell a Treasury bill before it matures if you need liquidity or if interest rates move favorably. However, selling early can complicate the tax picture.

When you sell early, part of your gain may still reflect accrued discount treated as interest. Depending on pricing and timing, a portion may also be classified as a capital gain or loss.

This is why good records are especially important. You should retain:

• Your original purchase price
• Your sale price
• The holding period
• Any accrued discount reported on tax forms

Secondary marketpricing fluctuates daily based on interest rate expectations, so early sales introduce variability that doesn’t exist when holding to maturity.

Treasury Bills vs. Other Low-Risk Investments: After-Tax Comparison

In some ways, T-bills are similar to other low-risk investments. However, they have unique tax characteristics, not other popular options.

T-Bills vs. CDs

Certificates of deposit are FDIC-insured and low risk, but CD interest is taxable at both the federal and state level, as explained by Charles Schwab. In high-tax states, state income taxes can materially reduce net returns.

T-bills may sometimes offer slightly lower nominal yields, but the state tax exemption often makes them more competitive on an after-tax basis.

T-Bills vs. Corporate Bonds

Corporate bonds typically offer higher yields, but introduce credit risk and full taxation at both federal and state levels. They lack the tax advantage and principal stability of Treasuries, per FINRA.

For conservative investors prioritizing capital preservation and tax efficiency, T-bills may provide a more predictable outcome, albeit with lower nominal yields.

T-Bills vs. Money Market Accounts

Money market accounts offer liquidity and convenience, but their yields are usually taxable at both federal and state levels, unless the fund holds Treasury-only securities. Some funds pass through partial state exemptions, which can vary annually according to the SEC.

When Treasury Bills Make Sense as a Tax-Planning Tool

Treasury bills can make sense in several common situations:

• Short-term cash parking for emergency funds or upcoming expenses
• High-tax-state strategies seeking tax-efficient interest income
• Laddering maturities to manage reinvestment risk and cash flow
• Preserving principal during rate uncertainty, allowing flexibility while earning competitive short-term yields

These use cases focus on practicality rather than chasing performance. T-bills are tools for stability, liquidity and predictable income, not growth. 

Common Mistakes and Record-Keeping Tips for T-Bill Investors

Common pitfalls include:

• Confusing interest with capital gains: T-bill earnings are generally treated as interest, not investment gains.
• Forgetting the state tax exemption: Some investors unnecessarily overestimate their tax liability.
• Poor record-keeping: Keeping purchase confirmations and maturity statements simplifies tax reporting.
• Ignoring small amounts: All earnings must be reported accurately.

Keeping confirmations and maturity statements simplifies tax reporting and reduces audit risk.

Example Scenarios: How Much Tax You Might Owe on a T-Bill

Here’s a look at different examples of how T-bills might be taxed.

Scenario 1: Federal Tax Only

You purchase a $10,000 T-bill for $9,700 and earn $300 at maturity. If you’re in the 22% federal tax bracket, you would owe approximately $66 in federal tax, leaving $234 net after tax.

Scenario 2: High-Tax State Comparison

If the same $300 came from a CD in a 7% state tax bracket, you’d owe another $21 in state tax. With a T-bill, that $21 stays in your pocket.

Scenario 3: Net Return Flow

• Purchase: $9,700
• Maturity: $10,000
• Earnings: $300
• Federal tax: $66
• Net after tax: $234

This illustrates how tax treatment affects real returns, not just headline yields.

Final Thoughts

Treasury bills are federally taxable but exempt from state and local taxes, making them a tax-efficient option for conservative investors. Understanding how their OID interest works and how it’s reported can help you avoid surprises and improve short-term cash management decisions.

Information is accurate as of Jan. 14, 2026.

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