The BIL ETF tax treatment splits between two levels of government: distributions are taxed as ordinary income on your federal return at rates from 10% to 37%, but most of that income is exempt from state and local tax because the fund holds U.S. Treasury bills. Getting the state piece right requires a supplemental document your broker won’t send you, and missing it is the most common reporting error with Treasury ETFs.
Federal Tax on BIL Distributions
BIL pays monthly distributions representing interest earned on the short-term Treasury bills inside the fund. Your brokerage statement labels these payments as “dividends,” but they’re taxed as ordinary income federally. You pay whatever your marginal rate happens to be, from 10% up to 37% under current law.
These distributions do not qualify for the lower rates that apply to qualified dividends. Qualified dividend income is limited to dividends from domestic corporations or qualified foreign corporations.1Office of the Law Revision Counsel. 26 U.S.C. 1 – Tax Imposed – Section: (h)(11) Interest on Treasury bills doesn’t meet that definition, because the U.S. government isn’t a corporation. So BIL income is taxed like interest from a bank account or CD, not at the preferential 0%, 15%, or 20% rates that apply to qualified dividends and long-term capital gains.
State and Local Tax Exemption
The offset comes at the state level. Federal law exempts interest on U.S. government obligations from state and local income tax.2Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation Because BIL invests almost entirely in Treasury bills, the vast majority of its distributions pass through that exemption. For investors in high-tax states, this can meaningfully boost after-tax yield compared to funds holding corporate debt.
The exemption covers only the share of distributions that actually comes from federal obligations. A small slice of the fund’s income may come from non-Treasury sources like repurchase agreements, and that portion remains state-taxable. Each year, State Street Global Advisors publishes a supplemental tax document listing the exact percentage of BIL’s distributions that qualifies as U.S. government interest. You need that percentage to subtract the exempt portion from your state taxable income.
Some states add a threshold requirement: the fund must hold at least 50% of its assets in federal obligations before shareholders can claim any state exemption. California, New York, and Connecticut are among the states imposing this type of rule. BIL typically clears that bar easily given its Treasury-focused mandate, but confirming eligibility through the fund’s annual supplemental report is worth the minute it takes. Investors in states with no income tax, such as Texas and Florida, can skip this step entirely.
The math can be meaningful in a taxable account. An investor in a state with a 9% or higher income tax rate who holds a fund where nearly all distributions qualify as government interest can save close to a full percentage point in annual after-tax yield compared to a comparable fund holding non-government debt.
The 3.8% Surtax for Higher Earners
Higher earners face an additional 3.8% tax on net investment income, and BIL distributions count toward the calculation. This surtax applies when your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married individuals filing separately.3Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax The tax is calculated on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
These thresholds are not adjusted for inflation, so they pull in more taxpayers over time. For someone above the threshold, the effective federal tax rate on BIL income can reach 40.8%, combining the 37% ordinary rate with the 3.8% surtax. Affected taxpayers file Form 8960 to calculate and report the additional tax.4Internal Revenue Service. Instructions for Form 8960
Selling BIL Shares
Selling BIL on the open market creates a taxable event. Shares held one year or less generate short-term capital gains taxed at your ordinary income rate. Shares held longer than one year qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
In practice, capital gains on BIL are tiny. The fund’s share price barely moves because its holdings are Treasury bills maturing within three months. Price fluctuations of a few cents per share are typical, so most investors realize negligible gains or losses regardless of holding period. The wash sale rule still applies if you sell at a loss and repurchase within 30 days,6Office of the Law Revision Counsel. 26 U.S.C. 1091 – Loss From Wash Sales of Stock or Securities though the small size of typical BIL losses limits its practical bite.
Where You Hold BIL Matters
The state tax exemption on Treasury interest only helps you if you hold BIL in a taxable brokerage account. Inside a traditional IRA or 401(k), the exemption is irrelevant because all withdrawals are taxed as ordinary income regardless of what the account held. The character of the underlying investment doesn’t survive distribution from a tax-deferred account.
Roth IRAs erase the calculation entirely. Qualified withdrawals from a Roth are tax-free at both the federal and state level, so the state exemption again adds nothing. If you’re choosing between BIL and a comparable non-government cash fund for a retirement account, the state exemption shouldn’t factor into your decision.
Tax Forms and Reporting
Your brokerage will issue the standard documents each year. Form 1099-DIV reports total ordinary dividends in Box 1a, which captures the BIL distributions you received.7Internal Revenue Service. Instructions for Form 1099-DIV If you sold shares during the year, Form 1099-B reports the proceeds and cost basis for each transaction.8Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
Neither form tells you how much of your BIL income qualifies for the state tax exemption. That figure comes from the supplemental tax information document published separately by State Street Global Advisors, typically available on its website in early February. The document lists the percentage of each fund’s income attributable to U.S. government obligations. You multiply that percentage by the total ordinary dividends in Box 1a of your 1099-DIV, and the resulting amount is what you subtract on your state return. Skip this step and you overpay state tax on income that was never state-taxable to begin with.