T-bills are taxable, but only by Washington. Interest on Treasury bills is subject to federal income tax and exempt from state and local income taxes, a split that makes bills more valuable the higher your state's tax rate. This page is our reference on how Treasury interest is taxed: the federal rules, the legal basis for the state exemption, when the tax is due, how Form 1099-INT reports it, how T-bill ETFs and money market funds pass the exemption through, and what it is worth by state. Tax rules change and depend on your circumstances, so treat the figures as illustrations and confirm your own situation with a tax professional. Everything else about owning bills is on the US Treasuries hub.
Are T-bills taxable at the federal level?
Yes: T-bill interest is ordinary income for federal tax, taxed at the same rates as wages and bank interest, with no special rate. A bill pays no coupon, so its interest is the discount, the face value you receive at maturity minus the price you paid. The IRS counts that as interest income, and its Topic 403 lists Treasury bills with notes and bonds as federally taxable but exempt from state and local income tax. Because it is interest rather than a capital gain, it never qualifies for the lower long-term capital gains rates. Unlike interest on most municipal bonds, it gets no federal exemption.
Two federal add-ons can apply. Interest is investment income for the net investment income tax of 3.8% on the smaller of net investment income and the amount by which modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly), and it counts toward the $1,500 of taxable interest above which you must file Schedule B. Bills held in a traditional or Roth IRA are the exception to all of this, because interest earned inside the account is not taxed as it is earned; that case is covered in T-bills in an IRA.
Why is T-bill interest exempt from state and local tax?
Federal law bars states and localities from taxing US government obligations, including the interest they pay, under 31 U.S.C. 3124. The statute applies the exemption to any form of state or local tax that would require the obligation or its interest to be counted in computing the tax. It has two exceptions: a nondiscriminatory franchise tax, or a similar nonproperty tax in its place, imposed on corporations, and estate or inheritance taxes. For an individual, that means no state or local income tax on bill interest, although a state can still include Treasuries in a taxable estate.
You claim the exemption on your state return, usually by subtracting the Treasury interest that was included in your federal income. California handles it on Schedule CA (540), New York has a subtraction for interest on US government bonds on Form IT-201, and Connecticut has one on Schedule 1 of Form CT-1040. In a state with no broad personal income tax, such as Florida or Texas, the exemption is worth nothing, because there is no income tax to escape.
When do you pay tax on T-bill interest?
You report T-bill interest in the year the bill matures or is sold, not the year you buy it, unless you elect to include it as it accrues. IRS Publication 550 says you generally report bill interest when the bill is paid at maturity, and the tax code says the discount on a short-term federal obligation does not accrue until the bill is paid, sold or otherwise disposed of (26 U.S.C. 454(b)). A 26-week bill bought in October 2026 that matures in April 2027 is therefore 2027 income, reported on the return you file in 2028.
Three refinements matter in practice:
- Rolling over does not defer tax. When a maturing bill is reinvested in a new one, the full discount on the old bill is still income in its maturity year.
- Selling early changes the character. A gain on a bill sold before maturity is ordinary income up to the share of the discount earned while you held it, with any excess taxed as a short-term capital gain. Worked numbers are in selling Treasuries before maturity.
- The accrual election. You can elect to include the discount in income as it accrues, but the election cannot be changed later without IRS consent.
How the maturity date interacts with year-end, including payments delayed by a holiday, is covered in what happens when a T-bill matures. A large maturity can also leave you short on estimated tax; TreasuryDirect will withhold up to 50% of the interest if you ask it to.
How is T-bill interest reported on Form 1099-INT?
T-bill interest appears in box 3 of Form 1099-INT, the box for interest on US savings bonds and Treasury obligations, separate from bank interest in box 1. That separation is what lets you, or your tax software, find the amount to subtract on a state return; on the federal return it is taxable interest like any other. Payers must send a 1099-INT once interest reaches $10, but the IRS requires you to report all taxable interest, with or without a form.
Where the form comes from depends on where you hold the bill:
- TreasuryDirect. One Form 1099 covers all your Treasury holdings, posted early each year under ManageDirect and then Manage My Taxes. It has a 1099-INT section for interest, a 1099-B section for maturing securities you did not buy at original issue and a 1099-OID section for TIPS. TreasuryDirect points out that its Taxable Transaction Summary is not the 1099 itself.
- Brokers. Bill interest is part of the broker's consolidated Form 1099, and sales before maturity appear in its 1099-B section.
- Withholding. If TreasuryDirect withheld tax at your request, the amount appears on the 1099 and counts as tax already paid.
Do T-bill ETFs and money market funds keep the state exemption?
Only partly: a fund's payouts are dividends, and states let you exclude just the share that came from US obligations, sometimes only if the fund clears a threshold. Federally, dividends from a T-bill ETF or a Treasury money market fund are taxed as ordinary dividends, much like the interest itself. For state purposes, each fund family publishes the percentage of income that came from US government obligations after the year ends; you multiply your ordinary dividends by that percentage to get the amount you may be able to exclude.
Not everything a government fund owns counts. Income from repurchase agreements and from securities of agencies such as Ginnie Mae, Fannie Mae and Freddie Mac is generally taxable by states, which is why funds that hold repos report lower percentages. California, Connecticut and New York also add a gate: the exclusion is available only if at least 50% of the fund's assets were in qualifying obligations at the end of each quarter of its tax year. A fund that misses that line passes through nothing in those states, even if part of its income came from Treasuries. Rules elsewhere vary, so check your own state's instructions.
| Fund | Type | Share of 2025 income from US obligations | Issuer says it met the 50% test |
|---|---|---|---|
| iShares 0-3 Month Treasury Bond ETF (SGOV) | Treasury bill ETF | 95.14% | Yes |
| iShares 0-1 Year Treasury Bond ETF (SHV) | Short-term Treasury ETF | 89.80% | Yes |
| Vanguard 0-3 Month Treasury Bill ETF (VBIL) | Treasury bill ETF | 100.00% | Yes |
| Vanguard Treasury Money Market Fund (VUSXX) | Money market fund | 100.00% | Yes |
| Vanguard Federal Money Market Fund (VMFXX) | Money market fund | 66.61% | Yes |
The percentages change every year with each fund's holdings, so use the figure published for the tax year you are filing. How these funds compare with owning bills outright is covered in T-bill ETFs vs buying T-bills and T-bills vs money market funds.
Worked example: Excluding fund dividends on a California return
- You received $1,000 of ordinary dividends in 2025 from the Vanguard Federal Money Market Fund.
- Vanguard reported that 66.61% of the fund's 2025 income came from US obligations and that it met the 50% test.
- You could subtract $1,000 × 66.61% = $666.10 on Schedule CA (540); the other $333.90 stays taxable in California.
- If the fund had held less than 50% in qualifying obligations at any quarter-end, the California subtraction would have been $0.
How much is the state tax exemption worth?
It depends on your state rate: the higher it is, the more a fully taxable yield must pay to match a T-bill after tax. The table compares a T-bill with a fully taxable investment, such as a CD or savings account, both yielding 4.25%, the 26-week bill's investment yield on October 30, 2026, for someone in the 24% federal bracket. The last column is the taxable-equivalent yield: what the taxable investment would need to pay to keep as much as the bill.
| State income tax rate | T-bill after tax | Fully taxable 4.25% after tax | Taxable yield needed to match the bill |
|---|---|---|---|
| 0% (no income tax) | 3.23% | 3.23% | 4.25% |
| 5% | 3.23% | 3.02% | 4.55% |
| 9.3% | 3.23% | 2.83% | 4.84% |
| 12.3% | 3.23% | 2.71% | 5.07% |
The taxable-equivalent yield is the bill yield × (1 − federal rate) ÷ (1 − federal rate − state rate). The 9.3% row matches California's bracket for 2025 single filers with taxable income between $72,724 and $371,479. The table ignores the federal deduction for state taxes, which narrows the gap a little for people who itemize, and local income taxes, which widen it.
Worked example: $50,000 of 26-week bills for a California resident
- Buying $50,000 of face value at a 4.11% discount rate costs $48,961.08 and pays $1,038.92 of interest at maturity.
- Federal tax at 24% is $249.34. California tax is $0, because the interest is subtracted on Schedule CA (540).
- After tax you keep $789.58.
- The same $1,038.92 from a fully taxable source would also owe $96.62 of California tax at 9.3%, leaving $692.96.
To see what a bill of any size would pay before tax, use the Treasury bill calculator.
What are the limits and risks of the T-bill tax advantage?
The exemption covers state and local income taxes only, and its value depends on rules that can change and on records you have to keep.
- Federal tax still applies. Bill interest is taxed at ordinary rates, and the net investment income tax can add 3.8% at higher incomes.
- Fund tests can flip. A fund that misses the 50% test at one quarter-end loses the exclusion in California, Connecticut and New York for that year, and its published percentage changes annually.
- Other taxes still reach Treasuries. Estate and inheritance taxes and corporate franchise taxes are outside the exemption.
- Retirement accounts change the picture. Many states, including New York and Massachusetts, tax IRA withdrawals in full whatever the account held, so the exemption rarely helps there, though a few allow a documented subtraction; see T-bills in an IRA.
- Timing risk. A large maturity lands entirely in one tax year, which can raise your bracket or create an estimated-tax shortfall.
- Rules change. State law, IRS forms and fund percentages are revised every year. This page explains the general rules as of November 2026; it is not tax advice, and a tax professional can apply them to your return.
Bills are one of several places to hold cash; the Learn home page maps the others.