Yes, Treasury bills are taxable, but only by the federal government. The interest you earn on a T-bill — the difference between what you paid and the face value at maturity — is treated as ordinary interest income on your federal return, and it is exempt from state and local income taxes under federal law.
Federal Tax on T-Bill Interest
The IRS classifies T-bill earnings as interest income, not capital gains, even though the profit comes from buying at a discount rather than receiving coupon payments. Your taxable interest equals the face value received at maturity minus the price you originally paid.
That interest is taxed at ordinary federal income tax rates. For 2026, rates run from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The bracket that applies is the same one that applies to your wages and other ordinary income; T-bill interest simply stacks on top.
Higher-income investors face an additional 3.8% Net Investment Income Tax. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold for your filing status: $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately.2Internal Revenue Service. Net Investment Income Tax
State and Local Tax Exemption
States and localities cannot tax interest on U.S. government obligations. Under 31 U.S.C. § 3124, states and their political subdivisions may not tax the obligation itself, the interest on it, or both.3Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation The exemption is uniform across all 50 states, and it is one of the main reasons T-bills look attractive to investors in high-tax states compared with fully taxable alternatives like bank CDs.
Claiming the exemption is your responsibility. Because T-bill interest is included in your federal adjusted gross income, and most states start their calculation from federal AGI, you have to subtract the T-bill interest back out on your state return. The line varies by state, but it is usually labeled as a subtraction for income exempt under federal law or for U.S. government obligation interest. Your Form 1099-INT identifies the amount in Box 3, so isolating the figure is straightforward.4Internal Revenue Service. Form 1099-INT – Instructions for Recipient
Two limits to keep in mind. States may still impose a nondiscriminatory franchise tax on corporations that hold Treasury obligations, and states may include the value of T-bills in their estate or inheritance taxes.3Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation The federal exemption covers the interest income; it does not shield the bills themselves from state-level death taxes.
When the Tax Hits
Most individual investors use the cash method and report T-bill interest in the year the bill matures or is sold, not as it accrues month by month.5Internal Revenue Service. Publication 550 – Investment Income and Expenses Federal law specifically provides that the discount on a short-term U.S. obligation with a maturity of one year or less does not accrue until the bill is paid at maturity, sold, or otherwise disposed of.6Office of the Law Revision Counsel. 26 U.S. Code 454 – Obligations Issued at Discount So if you buy a 26-week bill in October and it matures in April, all of the interest is reported on the following year’s return.
One calendar quirk trips people up. If a Treasury bill matures on December 31, the interest is reported on that year’s 1099-INT even if the cash lands in your account on the first business day of January.7TreasuryDirect. Tax Forms and Tax Withholding
Selling Before Maturity
If you sell a T-bill on the secondary market rather than holding it to maturity, any gain is still generally ordinary interest income, not a capital gain. Up to your ratable share of the original discount, the profit on sale is treated as interest.5Internal Revenue Service. Publication 550 – Investment Income and Expenses Because T-bills mature in one year or less, they fall outside the market discount and OID accrual rules that apply to longer-term bonds.8Office of the Law Revision Counsel. 26 U.S. Code 1278 – Definitions and Special Rules Your broker may report the amount on Form 1099-INT rather than Form 1099-B.
Where the Numbers Go on Your Return
If you hold your bills at TreasuryDirect, the government posts a 1099-INT to your account.9TreasuryDirect. 1099 – TreasuryDirect If you buy through a bank or brokerage, the institution sends a consolidated tax statement that includes the same form.
Look at Box 3, labeled “Interest on U.S. Savings Bonds and Treasury Obligations.” That figure is the total T-bill interest for the year, and it is separated from Box 1 precisely because it is exempt from state and local income tax.4Internal Revenue Service. Form 1099-INT – Instructions for Recipient If you held multiple T-bills maturing in the same year, check the Box 3 total against your own records.
On your federal return, Box 3 flows into the interest income line of Form 1040. If your total taxable interest from all sources exceeds $1,500 for the year, you also complete Schedule B and list each payer.10Internal Revenue Service. Instructions for Schedule B (Form 1040) On your state return, subtract the Box 3 amount using whatever line your state provides for federally exempt interest or U.S. government obligation income. Tax software usually handles both moves automatically once you enter the 1099-INT.
Estate, Gift, and Non-Resident Situations
The state income tax exemption does not extend to estate planning. The market value of Treasury bills is included in your federal gross estate along with cash, securities, and real estate.11Internal Revenue Service. Estate Tax For 2026, the federal lifetime exemption for combined estate and gift transfers is $15,000,000 per person,12Internal Revenue Service. What’s New – Estate and Gift Tax with a top rate of 40% on amounts above that threshold. The annual gift tax exclusion for 2026 is $19,000 per recipient.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 States with their own estate taxes often use much lower thresholds and can reach T-bill value, since 31 U.S.C. § 3124 does not block state death taxes.3Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation
Non-resident aliens face a different rule set. U.S.-source interest is generally subject to a flat 30% withholding tax,13Office of the Law Revision Counsel. 26 U.S.C. 1441 – Withholding of Tax on Nonresident Aliens but T-bill interest generally qualifies for the portfolio interest exemption under 26 U.S.C. § 871(h), which eliminates the withholding when the obligation is in registered form and the beneficial owner certifies non-U.S. status, usually with Form W-8BEN.14Office of the Law Revision Counsel. 26 U.S. Code 871 – Tax on Nonresident Alien Individuals Non-resident aliens who need to file a U.S. return use Form 1040-NR.15Internal Revenue Service. About Form 1040-NR, U.S. Nonresident Alien Income Tax Return