You finally did it. You moved that stagnant cash out of a low-yield savings account and parked it in U.S. Treasury bills. The rates looked great, the security is unmatched, and you’re feeling like a savvy macro-investor. But then, tax season rolls around. Now you're staring at your 1099-INT and wondering: is treasury bill interest taxable, and if so, how much of my hard-earned yield is Uncle Sam about to claw back?
The short answer? Yes. But the long answer is where the real money is saved.
Investing in Treasuries isn't just about the nominal rate you see on the screen when you hit "buy" on TreasuryDirect or through your brokerage. It’s about the "tax-equivalent yield." Because of a quirk in the U.S. tax code that dates back to the early 1900s, T-bills have a massive advantage over corporate bonds or high-yield CDs. They are a rare breed of investment that manages to be both incredibly safe and surprisingly tax-efficient, provided you live in the right zip code.
The Federal Reality of T-Bill Taxation
Let’s get the bad news out of the way first. At the federal level, the IRS treats your T-bill interest just like the wages you earn at your 9-to-5. It is taxed as ordinary income.
Unlike long-term capital gains from stocks you’ve held for years, which enjoy preferential lower rates, your T-bill earnings are lumped in with your salary. If you’re in the 24% tax bracket, you’re losing 24 cents of every dollar you earn in interest to the federal government. There is no getting around this. Whether you hold a 4-week, 13-week, or 52-week bill, the profit you make—which is technically the difference between the discounted price you paid and the face value you receive at maturity—is interest income.
Honestly, it’s a bit of a bummer. If you bought a $10,000 T-bill for $9,500, that $500 profit is fully taxable in the year the bill matures. You don't get to claim it as a capital gain just because the "price" went up. The IRS is very specific about this: the "original issue discount" (OID) on a Treasury bill is interest, period.
When do you actually pay?
This is where people get tripped up. Most T-bills are "zero-coupon" style investments. You don't get a monthly check. You buy it at a discount, and it grows to its full value. You owe the taxes in the year the bill matures or the year you sell it.
If you bought a 52-week bill in December 2025 and it matures in December 2026, you don't owe a dime in taxes for the 2025 tax year. It all hits in 2026. This can be a useful strategy for "tax shifting" if you expect to be in a lower tax bracket next year. You’re basically pushing your tax liability into the future.
Is Treasury Bill Interest Taxable at the State Level?
Here is the "Golden Ticket" of Treasury investing. Treasury bill interest is 100% exempt from state and local income taxes.
This is huge. Truly.
🔗 Read more: Jamie Dimon Explained: Why the King of Wall Street Still Matters in 2026
If you live in a high-tax state like California, New York, or Massachusetts, this one rule can make T-bills significantly more profitable than a high-yield savings account (HYSA) or a Certificate of Deposit (CD). Most people look at a bank CD offering 5.10% and a T-bill offering 5.00% and think the CD is better. They're wrong.
In a state like California, where the top marginal tax rate can hit double digits, that "lower" T-bill rate often puts more actual cash in your pocket. Why? Because the bank CD interest is taxed by both the IRS and Sacramento. The T-bill interest is only taxed by the IRS.
Why does this exemption exist?
It’s all about the "Constitutional Doctrine of Intergovernmental Tax Immunity." Basically, states aren't allowed to tax federal debt, and the federal government isn't allowed to tax state debt (like municipal bonds). This was solidified way back in the 1819 Supreme Court case McCulloch v. Maryland. Chief Justice John Marshall famously noted that "the power to tax involves the power to destroy." If New York could tax federal bonds out of existence, the federal government wouldn't be able to function.
So, thanks to 19th-century legal drama, you get a tax break today.
The 1099-INT Confusion: A Practical Example
When January rolls around, you’ll get a 1099-INT. If you use a broker like Fidelity, Charles Schwab, or Vanguard, it’s usually straightforward. They’ll list your Treasury interest in Box 3: Interest on U.S. Savings Bonds and Treas. Obligations.
Don't ignore that box.
If your tax software or your accountant accidentally puts that number into the same bucket as your bank interest, you will overpay your state taxes. I’ve seen it happen dozens of times. You have to ensure that your state tax return specifically subtracts the amount in Box 3 from your taxable income.
Imagine you earned $5,000 in interest last year. $2,500 came from a Chase savings account and $2,500 came from T-bills.
- Federal Tax: You pay tax on the full $5,000.
- State Tax: You only pay tax on the $2,500 from Chase.
If you live in a state with a 6% tax rate, failing to separate these means you're handing over $150 to the state for no reason. That’s a nice dinner out or a few tanks of gas gone because of a clerical error.
💡 You might also like: Influence: The Psychology of Persuasion Book and Why It Still Actually Works
What About T-Bills Held in an IRA?
The question of is treasury bill interest taxable gets a little weird when you involve retirement accounts.
If you hold T-bills inside a Traditional IRA or a 401(k), the state tax exemption doesn't really matter. Why? Because any money you pull out of a Traditional IRA is taxed as ordinary income anyway, regardless of whether it came from T-bill interest, stock dividends, or capital gains. The "source" of the money loses its identity once it enters the IRA wrapper.
In a Roth IRA, it’s even simpler. You don't pay taxes on the interest at all, provided you follow the withdrawal rules.
Basically, putting T-bills in a taxable brokerage account is where you get to "feel" the state tax benefit. Putting them in a retirement account is fine for safety, but you’re effectively "wasting" the state tax exemption because you can't double-dip on tax breaks.
Buying on the Secondary Market vs. TreasuryDirect
There’s a slight nuance if you buy T-bills on the secondary market (like through a broker) rather than at a direct auction.
If you buy a T-bill from another investor and you pay "accrued interest" or a premium/discount that differs from the original issue, your tax reporting might get slightly more complex. You might deal with "market discount" rules. Generally, for T-bills—which are short-term—this doesn't change the "ordinary income" status, but it can change the timing of when you report the income.
Stick to the 1099-INT. Your broker is required by the IRS to track the "cost basis" and the interest earned. Usually, they do a decent job, but it’s always worth checking the math if you’re buying and selling bills before they mature.
Selling a T-bill before maturity can result in a capital gain or loss, but because T-bills are so short-term and move so closely with interest rates, these amounts are usually negligible. However, if rates drop significantly and your bill's value rises, that profit from the sale is still technically treated as interest income up to the amount of the original discount.
The Hidden Trap: The Net Investment Income Tax (NIIT)
If you are a high earner—we’re talking a modified adjusted gross income over $200,000 for individuals or $250,000 for married couples—you might get hit with an extra tax.
📖 Related: How to make a living selling on eBay: What actually works in 2026
It’s called the Net Investment Income Tax (NIIT), and it’s a 3.8% surtax.
Sadly, Treasury interest is included in the calculation for NIIT. So, while you're skipping the state tax, you might be adding a nearly 4% federal "bonus" tax if your income is high enough. This is something people often overlook when they're calculating their "safe" yield. Your 5% T-bill might actually be a 3.5% T-bill after the 24% federal bracket and the 3.8% NIIT.
Always look at the "after-tax" return. It's the only number that actually buys groceries.
Comparing T-Bills to Municipal Bonds
Since we're talking about taxes, we have to mention "Munis."
Municipal bonds are usually exempt from federal taxes and often state taxes too (if you live in the state that issued the bond). If you're in the highest federal tax bracket (37%), a Muni bond paying 3.5% might actually be "better" than a T-bill paying 5%.
However, T-bills are backed by the full faith and credit of the U.S. government. A municipal bond is backed by the ability of a specific city or state to collect taxes or tolls. One is the "risk-free rate," the other is... mostly safe, but not quite the same.
If you're asking is treasury bill interest taxable because you're trying to hide from the IRS, T-bills aren't the answer—Munis are. But if you're trying to hide from your State's Department of Revenue, T-bills are a fantastic tool.
Practical Next Steps for the Tax-Savvy Investor
Don't just take my word for it. Tax laws change, and your specific situation might have quirks I can't see from here. Here is how you should handle your T-bill taxes starting today:
- Check your State Tax Bracket: Find out exactly what you pay in state income tax. If it’s 0% (shout out to Florida and Texas), then a T-bill has no tax advantage over a CD. If it’s 9%, the T-bill is a clear winner.
- Use a Tax-Equivalent Yield Calculator: Search for one online. Plug in the T-bill rate and your state tax rate to see what a bank CD would actually have to pay to beat the T-bill.
- Review your 1099s: When they arrive in February, verify that Treasury interest is in Box 3. If it’s in Box 1 (standard interest), call your broker. It needs to be in Box 3 so your tax software knows it’s state-exempt.
- Time your maturities: If you’re right on the edge of a higher tax bracket this year, consider buying bills that mature in January of next year.
- Talk to a Pro: If you have over $100,000 in Treasuries, a quick 15-minute call with a CPA to ensure your state filings are correct could save you thousands.
The reality is that is treasury bill interest taxable isn't a yes-or-no question. It’s a "it depends on where you live and how much you make" question. Use the state exemption to your advantage, watch out for the NIIT surtax, and always make sure your 1099-INT isn't lying to your tax software.
Treasuries are one of the last great "simple" investments left. They don't have the volatility of Bitcoin or the complexity of a real estate syndication. They just pay you to wait. Just make sure you aren't giving the state a "tip" they didn't earn.