Interest earned on all U.S. Treasury securities, including Treasury bills (T-Bills), is exempt from taxation at the state and local level but is fully taxable at the federal level. At the end of each tax year or early in the next (by Jan. 31), owners of Treasury bills should receive a Form 1099-INT from the Dept. of the Treasury. This form details how much interest was earned on government securities for the year—information that is also filed with the Internal Revenue Service (IRS).
Key Takeaways
- Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes.
- The interest income received in a year is recorded on Form 1099-INT.
- Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
- If you live in a state with high local taxes, T-bills might be more advantageous than other short-term fixed instruments, like CDs.
Understanding Treasury Bills (T-Bills)
But first, a quick recap of the asset. Treasury bills are short-term debt obligations that are fully backed by the faith and credit of the U.S. government. They are sold in denominations of $100 up to $5 million. T-bill maturity durations are all less than one calendar year. Common maturity durations are one month, three months (13 weeks), or six months (26 weeks).
Like all Treasury securities, T-bills are considered to be risk-free assets. The likelihood of the U.S. government defaulting on debt obligations is incredibly low, given its ability to tax and print money and, of course, the general strength and reputation of the U.S.
It was this reputation for safety that, during the 2007-2008 financial crisis, caused investors to flock to Treasury securities as losses in stocks and other assets in their portfolios mounted. Those who had already invested heavily in Treasury securities prior to the crisis did successfully safeguard their capital.
Tax Rate of Treasury Bills
The interest earned by a T-bill is taxable as investment income in the year the bill matures. It must be reported on your federal tax return, Form 1040, and is taxed at the investor's marginal tax rate.
Even if you don't receive a Form 1099-INT for some reason, you are responsible for reporting the interest income generated by your T-bills and paying taxes on that amount.
If you buy a T-bill at a discounted price and then sell it at a premium price, that profit might also be taxable as a capital gain.
The federal tax burden can be eased through automatic tax withholding. Investors who own Treasury bills can opt to have up to 50% of their interest earnings automatically withheld; the exact percentage can be specified through any retail securities site. The Treasury automatically transfers the withholdings to the U.S. Internal Revenue Service (IRS) and reports the amount that is withheld on the 1099-INT form.
Tax Advantages of T-Bills
Although T-bills don't pay the highest interest rate (the tradeoff for being so low-risk), their exemption from state and local taxes can give them an advantage over other short-term, fixed-income assets, such as certificates of deposit (CDs)—especially for investors living in high-income-tax states, such as California, Massachusetts, New York, and Oregon. CDs are fully taxable.
To compare the interest rate from a CD with the rate from a Treasury bill and see which works out better tax-wise, you have to calculate the after-tax yields for both investments.
As an example, say that you are a single taxpayer in New York with an income of $100,000 per year, and the one-year Treasury bill you are looking at yields 0.07% (as it is as of April 21, 2021). The federal tax rate for your income level is 24%, and the state income tax rate is 6.33%.
After federal taxes, your net earnings from the Treasury bill will be only 0.053%, or 0.07% x (100% - 24%). But the tax rate on the CD is higher since it also includes state taxes.
You would only keep 69.67% of the yields after taxes (100% - 24% - 6.33%). Divide 0.00053, the after-tax yield of the Treasury bill, by 0.7003 to get 0.00076, the equivalent yield for a certificate of deposit. A CD must therefore yield more than 0.076% to be a better deal than the Treasury at your income level.
Correction—June 9, 2022: An earlier version of this article incorrectly calculated the equivalent yields between Treasuries and CDs.
FAQs
Key Takeaways
How much tax do you pay on T-bills? ›
Each month, the T-bill ETF distributes taxable income to its shareholders, reflecting interest harvested from the short-term Treasuries it owns. Those earnings are taxable at the ordinary income tax rate that applies to salary, as much as 37%.
How to avoid taxes on Treasury bills? ›
The interest income that you may receive from investing in a treasury bill is exempt from any state or local income taxes, regardless of the state where you file your taxes. However, you will need to report interest income from these investments on your federal tax return.
What happens when a T-bill matures? ›
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
How much will I make on a 3 month treasury bill? ›
3 Month Treasury Bill Rate is at 5.25%, compared to 5.26% the previous market day and 5.20% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.
How much does a $1000 T bill cost? ›
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
How do you calculate income from T-bills? ›
To calculate yield, subtract the bill's purchase price from its face value and then divide the result by the bill's purchase price. Finally, multiply your answer by 100 to convert it to a percentage.
Do you pay capital gains tax on Treasury bills? ›
Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.
Are Treasury bills better than CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
What is the yield on a 6 month Treasury bill? ›
Basic Info
6 Month Treasury Rate is at 5.37%, compared to 5.38% the previous market day and 5.44% last year. This is higher than the long term average of 2.84%. The 6 Month Treasury Bill Rate is the yield received for investing in a US government issued treasury security that has a maturity of 6 months.
You can sell a T-Bill before its maturity date without penalty, although you will be charged a commission. (With CDs, you pay a sizeable penalty for early withdrawals.)
How do I sell my T-Bill at maturity? ›
You can hold Treasury bills until they mature or sell them before they mature. To sell a bill you hold in TreasuryDirect or Legacy TreasuryDirect, first transfer the bill to a bank, broker, or dealer, then ask the bank, broker, or dealer to sell the bill for you.
How much will 100k be worth in 30 years? ›
Answer and Explanation: The amount of $100,000 will grow to $432,194.24 after 30 years at a 5% annual return. The amount of $100,000 will grow to $1,006,265.69 after 30 years at an 8% annual return.
How to get 5% return? ›
Another place you could park money and earn 5% or more, without risking your principal within applicable insurance limits, is a high-yield savings account. High-yield savings accounts can also let you move money in and out of your account more freely than CDs do.
Are 3 month Treasuries tax free? ›
Treasury securities are issued in a wide range of maturities, from four weeks to 30 years. Generally, they are non-callable and the interest payments are exempt from state and local taxes – especially important for investors residing in high-tax states.
How are Treasury strips taxed? ›
Generally speaking, taxes are due on the interest earned each year, even though there is no cash payment until the bond reaches maturity or the STRIPS are sold. However, this tax can be delayed with a tax-deferred account, such as an individual retirement account (IRA).
Are treasury bonds taxed as capital gains or ordinary income? ›
The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes.
What taxes are paid to US Treasury? ›
The major source of revenue is from individual income taxes. Other revenue is received through social insurance taxes and contributions, excise taxes, trust funds, estate and gift taxes, and Customs duties.
What is the yield on a 52 week treasury bill? ›
| Bonds | Yield | Month |
|---|
| US 52W | 5.10 | -0.034% |
| US 2Y | 4.76 | -0.086% |
| US 3Y | 4.53 | -0.119% |
| US 5Y | 4.33 | -0.154% |
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