Do You Pay Taxes on Treasury Bills? What To Know

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Treasury bills are low-risk investments backed by the U.S. government — but don’t overlook how they’re taxed. Do you pay taxes on Treasury bills? In short, yes: T-bill interest is subject to federal tax, but you won’t pay state or local taxes on it.

Here’s all you need to know about how T-bills work and how they are taxed. 

What Are Treasury Bills?

If you’re thinking about buying Treasury bills, it helps to first understand how they work — and how taxes come into play.

• A Treasury bill is a short-term, government-issued security that earns interest.
• You can buy Treasury bills through TreasuryDirect. This is an online system created by the federal government to make it easy to buy and sell U.S. Treasury securities.
• Through TreasuryDirect, you can buy bills, notes and bonds.
• You can also purchase Treasury bills from independent brokerage sites like Public.com or from a bank.
• They come in increments of $100.
• You can sell a Treasury bill at any time but — as with CDs — you’ll lose out on any interest if you sell the bill before it matures.

Common T-Bill Terms

• Four weeks
• Eight weeks
• 13 weeks
• 26 weeks
• One year

Current Average Interest Rates

• Treasury bills have an average interest rate of 4.399%, as of Feb. 28, 2025.
• Rates vary depending on the term.

Do You Pay Taxes on Treasury Bills?

Interest earned on Treasury bills is taxed at the federal level but exempt from state and local income taxes. This applies whether you hold the bill to maturity or sell it early.

Federal Taxation

You’ll owe federal income tax on any interest you earn from T-bills. The interest is taxed at your ordinary income tax rate, based on your federal tax bracket.

When tax time comes around, you’ll typically receive a 1099-INT from the government or brokerage where you bought the bill. The amount listed shows how much interest you earned — and that’s what you’ll report on your return.

Here’s an example:

• Your adjusted gross income is $95,000 and you’re a single filer.
• Your interest from T-bills would be taxed at your marginal rate of 22% for 2024.

State and Local Taxation

One of the perks of investing in Treasury bills is that the interest you earn is not subject to state or local income tax. This can be a big benefit if you live in a high-tax state.

When Are Taxes Paid on T-Bills?

Unlike traditional bonds, Treasury bills don’t make regular interest payments. Instead, they’re sold at a discount and pay you the full face value at maturity. The difference between the purchase price and the face value is the interest you earn.

Here’s how it works:

• T-bills are issued at a discount. For example, you might buy a $1,000 T-bill for $950.
• You earn interest at maturity. When the T-bill matures, you receive the full $1,000, earning $50 in interest.
• Taxes are paid only when the interest is realized. That means you owe taxes in the year the bill matures or if you sell it before maturity.

You don’t pay taxes ats the bill gains value — only when you actually receive the interest through maturity or a sale.

Tax Reporting for Treasury Bills

At tax time, you’ll need to report your T-bill interest — here are the steps to do it:

1. Receive Form 1099-INT: If you earned interest on Treasury bills, you’ll get this form from the IRS.
2. Check Box 3: This is where the interest earned from U.S. Treasury securities will be listed.
3. Report it on Schedule B: Transfer the amount to this form.
4. Enter the total on your Form 1040: The amount from Schedule B will flow to line 2b.

Good To Know

If you buy your T-bills directly through TreasuryDirect, you can choose to have federal taxes automatically withheld from your interest.

Just be sure to verify that the right amount was withheld based on your income and filing status — your tax preparer can help with this.

Tax Strategies

While you can’t avoid paying taxes legally owed on T-bill earnings, there are a few ways to manage your tax liability more effectively:

• Hold T-bills in a tax-advantaged account: Placing your T-bills in an IRA or 401(k) means you won’t pay taxes as they mature — instead, taxes are deferred until you withdraw funds in retirement. Just be sure to speak with a financial advisor before allocating too much of your retirement portfolio to T-bills, since they aren’t designed for growth.
• Use deductions and credits to lower your taxable income: Work with a tax advisor to maximize your deductions and credits to knock down your taxable income as much as possible.
• Time your T-bill sales or maturity strategically: Consider the timing of your income to help stay within a lower tax bracket. For example, a joint filer with $90,000 in taxable income is in the 12% federal tax bracket — but an additional $10,000 would push them into the 22% bracket. Any T-bill income on top of that would be taxed at a higher rate.

The Bottom Line

T-bills are subject to federal taxes but are exempt from state and local income taxes, making them a potentially smart option for conservative investors looking to minimize their overall tax burden.

To make the most of your T-bill investment:

• Track your interest earnings using IRS Form 1099-INT.
• Know when tax is owed — typically when the bill matures or is sold.
• Consult a tax or financial advisor to determine the best strategy for your situation.

Elizabeth Constantineau contributed to the reporting for this article.

Information is accurate as of March 24, 2025.

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