Yes, you do pay taxes on Treasury bills, but only at the federal level. T-bill interest is taxed as ordinary income at federal rates from 10% to 37% for 2026, and it is exempt from state and local income taxes under federal law.1Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation That split treatment is one of the main reasons T-bills appeal to investors in high-tax states, but the federal bite is unavoidable, and several secondary taxes and thresholds can catch buyers off guard.
How the Federal Tax Works
Treasury bills don’t pay interest the way a savings account does. You buy the bill at a discount and receive its full face value at maturity. Pay $9,700 for a $10,000 bill and the $300 difference is your interest.2TreasuryDirect. Treasury Bills The IRS treats that $300 as ordinary interest income, not a capital gain, so it is taxed at the same rate as your wages.3Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
For 2026, single filers pay 10% on the first $12,400 of taxable income and hit the top 37% rate above $640,600.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Your T-bill interest stacks on top of your other income, so the rate you pay on it depends on where you land in the brackets. There is no preferential rate like the ones for long-term capital gains or qualified dividends.
Why State and Local Taxes Don’t Apply
Federal law shields interest on Treasury obligations from state and local income tax. 31 U.S.C. ยง 3124 exempts obligations of the United States from taxation by any state or political subdivision, and the exemption applies whether you buy through TreasuryDirect or a brokerage account.1Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation For a resident of a state with a top rate near or above 10%, that shield can meaningfully change how T-bill yields compare to bank CDs or corporate bonds.
Two carve-outs are worth flagging. States can impose nondiscriminatory franchise taxes on corporations that hold Treasuries, and states can include T-bills in the value of an estate for estate or inheritance tax purposes.1Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation The income tax exemption during your lifetime is absolute; the estate tax protection is not.
When the Tax Comes Due
Federal tax on T-bill interest hits in the year the bill matures or the year you sell it, not the year you buy. A 26-week bill purchased in October 2025 that matures in April 2026 creates a 2026 tax liability.5TreasuryDirect. Interest Income Reporting for Marketable Treasury Securities Most individual investors are cash-basis taxpayers, meaning the tax is triggered when the money becomes available to you.
Auto-reinvestment through TreasuryDirect catches a lot of people. When the proceeds from a maturing bill roll straight into a new one, you never see the cash, but the IRS still treats the interest as received in the year of maturity, because the funds were available before you chose to reinvest. An investor who ladders several bills with auto-reinvest can open a 1099-INT in January that is much larger than expected.
The 3.8% Surtax for Higher Earners
The Net Investment Income Tax adds 3.8% on top of the regular federal rate for higher-income investors. It applies when your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).6Internal Revenue Service. Topic No. 559, Net Investment Income Tax The tax is calculated on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold, so only the portion above the line is exposed.
These thresholds are not indexed for inflation, so more taxpayers cross them each year. A single filer earning $260,000 with $15,000 in T-bill interest owes the NIIT on part of that interest in addition to regular federal income tax. The surtax is easy to miss because it doesn’t appear on Form 1099-INT.
Selling a T-Bill Before Maturity
Sell on the secondary market and the treatment gets more layered. Any gain up to the discount that accrued while you held the bill is taxed as ordinary interest income, not capital gain.3Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses The accrued portion is figured proportionally based on the days you held the bill against its total term.
Buy a 26-week bill at a $400 discount and sell halfway through, and roughly $200 counts as interest income. If rates fell and you sold for more than the accrued value, the excess is a short-term capital gain, still taxed at ordinary rates since T-bills never reach the one-year mark that would qualify for long-term treatment. If rates rose and you sold at a loss, the loss can offset other capital gains on your return.
T-Bills Held Through Money Market Funds and ETFs
The federal treatment is identical when you hold T-bills indirectly: fund distributions traceable to T-bill interest are ordinary income on your federal return. The state exemption is where the details matter.
For the state exemption to pass through, the fund typically has to meet a minimum threshold of U.S. government holdings. Several states require at least 50% of a fund’s assets be in government securities before any of the dividends qualify for the exemption. Fund companies publish a supplemental statement each year showing the percentage of income derived from U.S. government obligations, and you multiply your total distribution by that percentage to figure the portion you can subtract on your state return.
A fund that falls below your state’s threshold gets no exemption at all, not a partial one. If your state requires 50% and the fund held 48%, the entire distribution is taxable at the state level. Read the supplemental statement before you file.
How to Report T-Bill Interest
Your broker or TreasuryDirect issues Form 1099-INT, usually by late January. T-bill interest shows up in Box 3, “Interest on U.S. Savings Bonds and Treasury Obligations,” not Box 1 where bank interest appears.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID TreasuryDirect users can pull the form from the ManageDirect section of the account.
The Box 3 amount flows to Form 1040, line 2b as part of total taxable interest. If your taxable interest across all sources exceeds $1,500 for the year, Schedule B is required, listing each payer and amount.8Internal Revenue Service. Instructions for Schedule B (Form 1040) Confirm the reported figure matches the difference between what you paid and what you received at maturity; discrepancies are easier to fix before filing than after an IRS notice arrives.
On your state return, look for the line that subtracts interest from U.S. obligations. Most state forms include a specific adjustment. Enter the full Box 3 amount to reduce state taxable income. Tax software usually prompts you for it, but skipping the question or entering zero means overpaying state tax with no warning.
Effects on Social Security and Medicare
Retirees should know that T-bill interest counts toward the income measures that decide whether Social Security benefits are taxed. The IRS “combined income” formula adds your adjusted gross income, any tax-exempt interest, and half of your Social Security benefits. Above $25,000 (single) or $32,000 (joint), up to 50% of benefits may be taxed; above $34,000 (single) or $44,000 (joint), up to 85% may be. These thresholds have never been indexed for inflation, so modest T-bill earnings can push a retiree across them.
T-bill interest also feeds into Medicare premium calculations. Part B and Part D premiums are based on MAGI from two years earlier, so a large T-bill portfolio in 2024 can raise 2026 premiums. The first IRMAA surcharge for single filers begins at $109,000 of MAGI, and for married couples filing jointly at $218,000.9Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event Surcharges rise in tiers and can add hundreds of dollars a month at higher income levels.