Yes, you pay taxes on Treasury bills, but only at the federal level. T-bill interest is taxed as ordinary income by the IRS and is fully exempt from state and local income tax under federal law. Your federal rate depends on your bracket, which runs from 10% to 37% for 2026, and high earners may owe an additional 3.8% net investment income tax on top of that.
How the Federal Tax Applies
T-bills are sold at a discount from face value. If you pay $9,800 for a $10,000 bill, the $200 you receive at maturity is your return. The IRS treats that discount as ordinary interest income, not as a capital gain, even though it doesn’t arrive as a periodic interest payment.1Internal Revenue Service. Topic No. 403, Interest Received
Timing matters. For a Treasury obligation with a maturity of one year or less, the discount does not accrue until the bill matures, is sold, or is otherwise disposed of.2Office of the Law Revision Counsel. 26 U.S.C. 454 – Obligations Issued at Discount You report the income in the year the bill matures, not the year you bought it. Buy a 26-week bill in November and the interest lands on next year’s return, even if you immediately roll the proceeds into a new bill.
Your rate on that interest tracks your ordinary income bracket. For 2026, a single filer pays 10% on the first $12,400 of taxable income, with the top 37% rate kicking in above $640,600.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The 3.8% Surtax for High Earners
Interest, including T-bill interest, counts as net investment income for purposes of the 3.8% net investment income tax. The surtax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds:4Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- $250,000 for married filing jointly
- $200,000 for single or head of household
- $125,000 for married filing separately
A single filer with $220,000 of modified adjusted gross income and $30,000 of T-bill interest would owe 3.8% on the $20,000 above the threshold, adding $760 on top of regular income tax.
Why States Cannot Tax T-Bill Interest
Federal law bars state and local governments from taxing interest on U.S. government obligations. The statute exempts these obligations from any state or local tax that would require the obligation or its interest to enter into a tax calculation, with narrow exceptions for nondiscriminatory corporate franchise taxes and estate or inheritance taxes.5Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation
In practice, you subtract the Treasury interest reported on your federal return from your state adjusted gross income on your state return. The exact line depends on the state, but the subtraction is available whether you bought through a broker or through TreasuryDirect. If you live in a state with a 9% top rate, that exemption keeps a meaningful chunk of your return out of state hands.
One boundary: the exemption covers interest, not capital gains from selling a T-bill on the secondary market. The statute directs that gains and losses on government obligations are governed by the Internal Revenue Code, which leaves room for states to tax those gains.5Office of the Law Revision Counsel. 31 U.S.C. 3124 – Exemption From Taxation Hold to maturity and the entire return is exempt at the state level. Sell early at a profit above the accrued discount and the capital gain portion may be taxable by your state.
Selling Before Maturity
A pre-maturity sale splits into two tax pieces. The portion of the original discount that accrued during your holding period is ordinary interest income.6TreasuryDirect. Interest Income Reporting for Marketable Treasury Securities The difference between your sale price and your adjusted basis (purchase price plus accrued discount) is a capital gain or loss.
If rates fell after you bought, the bill’s market price rose and you may realize a gain. If rates rose, you may realize a loss. Because maturities run one year or less, these are almost always short-term gains or losses, taxed at ordinary income rates.
Losses can offset other capital gains dollar for dollar. Excess losses can offset up to $3,000 of ordinary income ($1,500 if married filing separately), with anything left over carrying forward to future years.7Office of the Law Revision Counsel. 26 U.S.C. 1211 – Limitation on Capital Losses
Watch the wash sale rule. Selling at a loss and buying another T-bill within 30 days before or after can disallow the loss if the two bills are “substantially identical.”8eCFR. 26 CFR 1.1091-1 – Losses From Wash Sales of Stock or Securities Bills with the same maturity length bought in close succession are more likely to trigger the rule than bills with meaningfully different terms. Keep clean records of purchase and sale dates.
T-Bills Inside a Retirement Account
Holding T-bills in a traditional IRA or 401(k) changes the picture. Interest grows tax-deferred inside the account, but withdrawals come out as ordinary income, and most states do not preserve the Treasury interest exemption for those distributions. The state generally treats the whole withdrawal as ordinary income regardless of what the underlying investments were. If the state exemption is part of why you chose T-bills, a taxable brokerage account keeps that benefit intact.
Reporting the Interest
Your broker or TreasuryDirect issues Form 1099-INT by January 31. T-bill interest appears in Box 3, labeled “Interest on U.S. Savings Bonds and Treasury Obligations,” not in Box 1 with other taxable interest.9Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID The separate box makes the state-exempt amount easy to identify.
If total taxable interest from all sources tops $1,500, you file Schedule B with your Form 1040.10Internal Revenue Service. Instructions for Schedule B (Form 1040) Below that, you still report the interest, just directly on the 1040. TreasuryDirect delivers 1099-INTs electronically inside your account rather than mailing paper copies, so you need to log in and download it.11U.S. Department of the Treasury. Tax Information for EE and I Bonds The IRS matches your return against the 1099-INT data it already has.
What Happens If You Don’t Report
Underreporting can trigger an accuracy-related penalty of 20% on the underpaid tax if the IRS finds you were negligent or substantially understated your income.12Office of the Law Revision Counsel. 26 U.S.C. 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Backup withholding is a separate issue. If you failed to give your broker or TreasuryDirect a correct taxpayer identification number, or if the IRS has told the payer that your TIN is wrong or that you’ve underreported interest in the past, 24% is withheld from your interest payments.13Internal Revenue Service. Publication 15, Employer’s Tax Guide14Internal Revenue Service. Topic No. 307, Backup Withholding The withheld amount is credited toward your tax bill when you file, so it functions as a prepayment, but it does shrink the cash you see during the year.