The tax rate on Treasury bills is your ordinary federal income tax rate, which runs from 10% to 37% for 2026, with no state or local income tax owed on that interest. Higher earners can also owe an extra 3.8% Net Investment Income Tax on top of the federal rate. Because T-Bills are sold at a discount and pay no coupon, the profit you earn at maturity is treated as interest income, not a capital gain, so it never qualifies for the lower long-term capital gains rates.
Federal Rate on T-Bill Income
The discount you earn on a T-Bill is classified as Original Issue Discount, defined by the tax code as the difference between what you pay and the face value you receive at maturity.1Office of the Law Revision Counsel. 26 U.S. Code 1273 – Determination of Amount of Original Issue Discount Buy a $10,000 bill for $9,750 and the $250 you gain at maturity is your taxable income. The IRS treats it as interest, so it stacks on top of your other ordinary income and is taxed at your marginal bracket.
For 2026, the federal brackets for single filers are:
- 10% up to $12,400
- 12% from $12,400 to $50,400
- 22% from $50,400 to $105,700
- 24% from $105,700 to $201,775
- 32% from $201,775 to $256,225
- 35% from $256,225 to $640,600
- 37% above $640,600
Married couples filing jointly reach the 37% bracket at income above $768,700.2Internal Revenue Service. Revenue Procedure 2025-32 These rates trace back to the Tax Cuts and Jobs Act of 2017 and were made permanent by the One Big Beautiful Bill Act signed in July 2025.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
T-Bill income never qualifies for the preferential rates that apply to long-term capital gains and qualified dividends. Hold to maturity and you have interest income, period. Sell early and the gain tied to accrued discount is still taxed as ordinary interest.
No State or Local Tax
Federal law bars states and local governments from taxing income earned on U.S. government obligations, including T-Bills. The statute reaches any form of taxation that would require the obligation or its interest to be factored into a tax calculation.4Office of the Law Revision Counsel. 31 USC 3124 – Exemption from Taxation The only carve-outs are nondiscriminatory corporate franchise taxes and estate or inheritance taxes.
The exemption is one of the main reasons investors pick T-Bills over corporate bonds or CDs. Someone in a state with a 10% top rate who earns $5,000 in T-Bill interest keeps $500 that would have gone to state tax on a comparable corporate bond.
To compare a T-Bill yield against a fully taxable investment, divide the T-Bill yield by (1 minus your state tax rate). A T-Bill yielding 4.5% is equivalent to a 5% corporate bond yield for an investor with a 10% state rate: 4.5% รท 0.90 = 5.0%. The higher your state tax rate, the more competitive T-Bills look.
The Extra 3.8% for Higher Earners
Higher earners owe an additional 3.8% Net Investment Income Tax on T-Bill interest. The surtax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds:5Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- $200,000 for single or head of household
- $250,000 for married filing jointly
- $125,000 for married filing separately
Interest income, including T-Bill OID, counts as net investment income.6Internal Revenue Service. Questions and Answers on the Net Investment Income Tax That pushes the effective top federal rate on T-Bill income to 40.8% (37% plus 3.8%) for the highest earners. The thresholds are not indexed for inflation, so they pull in more taxpayers each year. The state exemption offers no relief here, since NIIT is a federal tax.
When and How To Report It
T-Bills are short-term obligations that mature in one year or less, and the tax code excludes them from the general rule requiring annual OID accrual.7Office of the Law Revision Counsel. 26 U.S. Code 1272 – Current Inclusion in Income of Original Issue Discount You report the full discount as interest income in the year the bill matures or is sold, not the year you bought it.8Internal Revenue Service. Publication 550 – Investment Income and Expenses A 26-week bill purchased in October 2025 that matures in April 2026 produces income reportable on your 2026 return.9TreasuryDirect. Interest Income Reporting for Marketable Treasury Securities
The timing rule applies regardless of your accounting method. You can elect to include the discount in income as it accrues, but for a bill maturing in a few months the difference is negligible; the election mainly matters when a bill straddles two tax years, and once made it applies to all similar obligations you hold.
Your brokerage or TreasuryDirect will report the interest on Form 1099-INT (box 3 covers U.S. savings bond and Treasury interest) or Form 1099-OID.10Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Include the amount with your other interest income on Schedule B of Form 1040. When you file your state return, subtract the Treasury interest to claim the state exemption.
Selling a T-Bill Before Maturity
Selling on the secondary market before maturity adds a second layer to the tax treatment. You have to split the proceeds into two pieces: the accrued OID through the date of sale, and any additional gain or loss beyond that.
The accrued OID portion is ordinary interest income, taxed at your marginal rate, the same as if you had held to maturity. Any remaining gain or loss is a short-term capital gain or loss, because T-Bills by definition have maturities of one year or less.11TreasuryDirect. Treasury Bills Short-term capital gains are taxed at ordinary income rates, so in practice the entire profit lands at your marginal rate either way.
The split matters more when the trade goes against you. Selling for less than your adjusted basis (purchase price plus accrued OID) produces a short-term capital loss that can offset capital gains realized elsewhere. If your capital losses exceed your capital gains, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if married filing separately.12Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses Any unused loss carries forward to future tax years indefinitely.13Internal Revenue Service. Topic No. 409, Capital Gains and Losses
What the Exemption Does Not Cover
The state and local tax exemption does not extend to estate, inheritance, or gift taxes. Federal law specifically carves out that exception,4Office of the Law Revision Counsel. 31 USC 3124 – Exemption from Taxation so T-Bills you own at death are included in your gross estate at fair market value like any other financial asset, and T-Bills transferred as gifts follow the same gift tax rules that apply to any other property.14eCFR. 26 CFR 25.2511-1 – Transfers in General Nonresident aliens face a different regime: a 30% default withholding rate on U.S. source interest, usually eliminated by the portfolio interest exemption when the investor provides Form W-8BEN.15Office of the Law Revision Counsel. 26 U.S. Code 871 – Tax on Nonresident Alien Individuals