Are T-Bills Taxable? Federal Yes, State No

Yes, but only once. T-bill interest is taxed by the IRS, and it's exempt from state and local income tax in every state. If you live somewhere with a state income tax, that exemption means a T-bill can leave you with more money than a savings account paying the same yield, or even a slightly higher one.

The short answer

If you hold a Treasury bill to maturity, the split is simple. You report the interest on your federal return like any other interest. You don't owe state or local income tax on it.

The same goes for Treasury notes and bonds. Your state doesn't get a say here: the exemption comes from federal law, so it applies whether or not your state likes it.

So when you compare a bill with a savings account or CD, start with the yield and then work out what you'll keep after tax. If your state doesn't tax interest income, the T-bill exemption doesn't give you an extra advantage there.

Money market funds are a different story. They pay dividends, and how your state treats them depends on what the fund holds and on your state's own rules.

How T-bill interest is calculated for tax

Treasury bills are issued at a discount in $100 multiples. You pay the discounted price and receive the face value when the bill matures. The difference is interest income for federal tax purposes.

Here's a worked example, using example amounts rather than a current price. You pay $9,800 for a bill with a $10,000 face value. At maturity, you receive $10,000. Your interest income is $200.

Only the $200 is income. The other $9,800 is your own money coming back, so don't panic when the full $10,000 lands in your account.

That $200 is what you earned over the bill's whole term, not an annual yield. For what bills pay right now, see today's T-bill rates.

If you paid more than face value, the treatment changes. IRS Publication 550 says you generally report that premium as a section 171 deduction when the bill is paid at maturity.

When you pay the tax

You generally report T-bill interest in the year the bill matures and pays out, not the year you bought it.

For example, suppose you buy a bill late in one calendar year and it matures in the next. You generally report the interest in the next year's income, when the bill matures.

So the term you pick decides which tax year the interest lands in, as well as when you get your cash back. Available terms are 4, 6, 8, 13, 17, 26 and 52 weeks. The how to buy T-bills guide explains the purchase process and terms.

That's for a bill you hold until it pays. Selling early works differently, and we cover it below.

The forms you'll get

Treasury interest belongs in box 3 of Form 1099-INT, rather than box 1. If you hold bills through a broker, that form may be part of a consolidated tax statement.

You should receive Form 1099-INT or Form 1099-OID if you receive $10 or more in interest. But $10 is a form threshold, not an allowance that makes smaller amounts tax free. You must report interest even when no form arrives.

Where to look on the forms:

• Form 1099-INT, box 3: Interest on Treasury bills, notes and bonds.
• Form 1099-INT, box 12: Bond premium on Treasury obligations.
• Form 1099-OID, box 8: Original issue discount on US Treasury obligations.

If a number doesn't match your own records, sort it out with the payer before you file.

Remember the state exemption doesn't take Treasury interest off your federal return. It still goes on there.

Why the state exemption matters

A savings account and a T-bill can show the same yield but leave different amounts after state income tax. The difference depends on whether your state taxes the account's interest and the rate that applies to you.

Consider this simplified example. Every amount and rate here is an example, not a current offer. Suppose you have $10,000 earning an annual yield of 4%, producing $400 of interest. Assume your state taxes savings account interest at an example rate of 6%.

The savings account's $400 would produce $24 in state tax, leaving $376 before federal tax. A T-bill producing the same $400 of interest would have no state income tax on that interest. The example state tax saving is $24.

You can also compare yields directly. Divide the T-bill yield by one minus the state income tax rate, with the rate written as a decimal. That gives a simplified state tax-equivalent yield.

Using the same example rates, divide 4% by 0.94. The result is about 4.26%. A savings account would need roughly that example yield to match the T-bill's 4% after the assumed state tax, before federal tax.

Keep in mind this is simplified. Federal tax still applies to both, and a full calculation for your own return can come out a little different. Treat it as a way to see what the state exemption is worth, not as your personal tax bill.

State by state: where the exemption helps

The short version: no state taxes T-bill interest. What changes from state to state is whether that's worth anything to you. The middle column follows the Tax Foundation's list of state income taxes as of January 1, 2026.

In states without individual income tax, the exemption is worth nothing extra, so compare pre-tax yields. Washington taxes capital gains income of high earners, but doesn't tax interest. New Hampshire repealed its interest and dividends tax as of 2025.

Selling before maturity

If you sell a bill before it matures, the tax works a bit differently. For short-term government obligations, a gain is ordinary income up to your ratable share of the acquisition discount. That discount is the redemption price at maturity minus your basis.

Generally, any gain above that amount is a capital gain. A sale can also produce a loss if rates have risen. Don't assume the whole sale gain is capital gain just because you sold an investment.

Your basis and the acquisition discount drive the sum, so the simple price versus face value example from earlier only works for a bill you hold to the end.

T-bill funds and ETFs are different

A fund full of T-bills isn't taxed the same way as a bill you own yourself. Money market funds and T-bill ETFs pay dividends reported on Form 1099-DIV. Their state treatment depends on the state's rules and the fund's published share of US government income.

New York lets you subtract interest from US government obligations on the state return. For mutual fund dividends, the fund must meet a 50% asset requirement each quarter. The qualifying share then depends on the portion of taxable income from federal obligations. Contact the fund for details.

California also has a 50% asset rule for certain mutual funds. Its instructions cover funds holding tax-exempt US obligations and/or California or its municipal obligations. The exempt dividend amount appears on the annual statement or the statement accompanying Form 1099-DIV.

Those are two states, not a national rule. Before you count on any state tax saving from a fund, check the fund's year-end tax letter and your state's form instructions. A fund called "Treasury" doesn't automatically qualify.

What isn't exempt

The exemption discussed here is for state and local income taxes on Treasury interest. Federal income tax still applies.

Federal law also allows exceptions for estate or inheritance taxes. The bills can still count for those taxes. Corporations can face certain nondiscriminatory state franchise taxes, or qualifying nonproperty taxes imposed instead of franchise taxes.

For a saver comparing accounts, none of that changes much. The exemption covers state and local income tax on the interest, and that's where the saving comes from.

Quick answers

Do I pay state tax on T-bills?

You don't pay state or local income tax on interest from a directly held T-bill. Federal income tax still applies.

Are T-bills taxed when I buy or at maturity?

You generally report the interest when the bill is paid at maturity. If you sell before then, the sale needs its own tax calculation.

Do I get a 1099 if I earned under $10?

You may not receive a form below $10. You still have to report the interest, even without one.

Are T-bill ETFs state tax free?

Don't assume the whole dividend is exempt. Check your state's rules and the fund's year-end tax letter for the qualifying share.

Is T-bill interest taxed as capital gains?

The discount earned by holding a bill to maturity is interest income. An early sale can produce ordinary income and, generally, capital gain above the applicable acquisition discount, or a loss.

This is general information, not tax advice, so check with a tax professional about your own return. To compare what bills pay this week, see today's T-bill rates.