Tax Facts
7626 / How is an investor taxed on the gain or loss on the sale or maturity of a Treasury bill (T-bill)?
T-bills are capital assets.1 On sale or maturity of the bill, the seller recovers the tax basis (generally cost plus broker’s fees on acquisition) tax-free. Any gain realized over the tax basis must be treated as ordinary income to the extent it represents recovery of discount. Any excess over that is capital gain.2 (Generally, the gain is short-term because the holding period for short-term gain is one year or less.3 See Q 702 for the treatment of capital gains and losses.)
The amount of discount treated as ordinary income is determined in the following manner. Any individual holding the bill at maturity includes as ordinary income the difference between the tax basis and the bill’s face value. (The difference between an individual’s basis and the bill’s face value is called “acquisition discount.”) Any individual who sells the bill prior to maturity includes as ordinary income only a portion of the acquisition discount based on the total time he or she held the bill; the amount included is the acquisition discount multiplied by a fraction having as numerator the number of days the individual held the obligation and as denominator the number of days after he or she acquired the bill up to and including the maturity date.4 This formula enables each holder to determine the portion of any gain to be treated as interest income without reference to the original discount or the treatment applicable to any other holder.
An owner may elect irrevocably on a bill-by-bill basis to compute the amount of discount on a daily compounding basis instead of in equal daily portions.5
If the investor has elected to include discount in income as it accrues prior to sale, the tax basis is increased by the amount included, and the entire gain is capital gain (see Q 7625).6
If instead of a gain, loss is realized on sale or maturity, it is a capital loss.
The installment method for recognizing and taxing gain is not available for securities traded on an established securities market. As a result, gain from sale is included in income for the year in which the trade date occurs even if one or more payments are received in the subsequent tax year.7
The interest is exempt from all state and local income taxes.8
If a Treasury bill was held as part of a tax straddle, the additional rules and qualifications explained in Q 7593 to Q 7614 apply; if a Treasury bill was held as part of a conversion transaction, the additional rules explained in Q 7615 and Q 7616 apply.
If the transfer is between spouses, or between former spouses incident to divorce, see Q 789.9
The amount of discount treated as ordinary income is determined in the following manner. Any individual holding the bill at maturity includes as ordinary income the difference between the tax basis and the bill’s face value. (The difference between an individual’s basis and the bill’s face value is called “acquisition discount.”) Any individual who sells the bill prior to maturity includes as ordinary income only a portion of the acquisition discount based on the total time he or she held the bill; the amount included is the acquisition discount multiplied by a fraction having as numerator the number of days the individual held the obligation and as denominator the number of days after he or she acquired the bill up to and including the maturity date.4 This formula enables each holder to determine the portion of any gain to be treated as interest income without reference to the original discount or the treatment applicable to any other holder.
An owner may elect irrevocably on a bill-by-bill basis to compute the amount of discount on a daily compounding basis instead of in equal daily portions.5
If the investor has elected to include discount in income as it accrues prior to sale, the tax basis is increased by the amount included, and the entire gain is capital gain (see Q 7625).6
If instead of a gain, loss is realized on sale or maturity, it is a capital loss.
The installment method for recognizing and taxing gain is not available for securities traded on an established securities market. As a result, gain from sale is included in income for the year in which the trade date occurs even if one or more payments are received in the subsequent tax year.7
The interest is exempt from all state and local income taxes.8
If a Treasury bill was held as part of a tax straddle, the additional rules and qualifications explained in Q 7593 to Q 7614 apply; if a Treasury bill was held as part of a conversion transaction, the additional rules explained in Q 7615 and Q 7616 apply.
If the transfer is between spouses, or between former spouses incident to divorce, see Q 789.9
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