Short Term Taxable Obligations

Treasury bills (T-bills) are obligations of the United States government, generally issued with 4-, 13-, 26-, and 52-week maturity periods. Treasury bills are issued in minimum denominations of $100 with $100 increments thereafter. Treasury bills are issued without interest and on a discount basis (that is, they are issued at a price that is less than the amount for which they will be redeemed at maturity). The price is determined at auction (13- and 26-week bills are generally auctioned on Monday of each week; four-week bills are generally auctioned on Tuesday of each week; 52-week bills are generally auctioned every four weeks on Tuesday).

<div class="Section1">Deduction of interest paid on amounts borrowed by a taxpayer to purchase or carry Treasury bills or short-term taxable corporate obligations may be subject to limitation and deferral. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8045">8045</a> for details.<a href="#_ftn1" name="_ftnref1">¹</a> Certain short sale expenses (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7529">7529</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7530">7530</a>) may be treated as interest within this rule.<a href="#_ftn2" name="_ftnref2">²</a> Any deductible interest expense will also be subject to the general limit on otherwise allowable investment interest expense deductions (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8040">8040</a>).<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1282(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1282(c).<br /> <br /> </div></div><br />

<div class="Section1">No. The amount of interest, represented by the discount (at issue or on the market) from face value, is not required to be included in income by a cash basis investor until the date on which the obligation is paid at maturity, sold, or otherwise disposed of as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7626">7626</a>.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> However, a cash basis investor may elect to include in income, as it accrues prior to sale or redemption, the difference between the stated redemption price at maturity and his or her basis in the obligation (this difference is called &ldquo;acquisition discount&rdquo;). Such an election may not be limited to a particular bill, but applies to all short-term taxable obligations acquired on or after the first day of the first taxable year for which the election is made, and it continues to apply until the Service consents to revocation of the election.<a href="#_ftn2" name="_ftnref2">²</a> (Short-term obligations are those having a fixed maturity date of one year or less after issue.)<a href="#_ftn3" name="_ftnref3">³</a> The election affects short-term taxable corporate obligations as well; however, in the case of corporate obligations, original issue discount is included unless the investor chooses to include &ldquo;acquisition discount&rdquo; with respect to all of them.<a href="#_ftn4" name="_ftnref4">⁴</a> With respect to interest-paying, short-term corporate obligations, elections to include discount as it accrues will also have the effect of requiring the taxpayer to include stated interest payments (not otherwise includable in income until paid) in income as they accrue.<a href="#_ftn5" name="_ftnref5">⁵</a> <em><em>See also</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7627">7627</a>.<br /> <br /> Under the election, acquisition discount is considered to accrue daily on a ratable basis. That is, the amount of discount is divided by the number of days after the day the taxpayer acquired the obligation up to and including the day of its maturity.<a href="#_ftn6" name="_ftnref6">⁶</a> The taxpayer must include an amount equal to the sum of the daily portions for each day in the tax year he or she held the obligation.<a href="#_ftn7" name="_ftnref7">⁷</a> However, a taxpayer electing to include acquisition discount as it accrues may elect, under regulations, with respect to particular obligations, a constant interest rate (using yield to maturity based on the cost of the bill and daily compounding) and use ratable accrual on other short-term obligations. Once made, this election is irrevocable with respect to the obligations to which it applies.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> This election may, under some circumstances, be advantageous where leveraging is used by a cash basis investor to purchase or carry Treasury bills, since deduction of the interest expense up to the amount of discount accruing during the year must be deferred unless discount is currently included (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8045">8045</a>).<br /> <br /> While a cash basis investor is not usually required to include discount in income prior to sale or other disposition, certain taxpayers must include acquisition discount in income. The mandatory accrual rules apply to bills (1) held by accrual basis taxpayers, (2) held by a bank, (3) held by a regulated investment company (RIC) or common trust fund, (4) held as inventory, (5) identified<a href="#_ftn9" name="_ftnref9">⁹</a> as part of a hedging transaction, or (6) held by a pass-through entity (e.g., a trust, partnership, or S corporation) formed or availed of to avoid the mandatory inclusion rule, or a pass-through entity in any year in which taxpayers who would be subject to the rule own 20&nbsp;percent or more of the value of the interests in the entity for 90 days or more.<a href="#_ftn10" name="_ftnref10">¹⁰</a> A taxpayer subject to these mandatory accrual rules may, under regulations, elect irrevocably to accrue discount with respect to any obligation on a constant rate (compounded daily) instead of ratably.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> The basis of a T-bill is increased by amounts of accrued discount and interest included in income prior to disposition or redemption.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;454(b), 1272(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1282(b)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(c).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(a)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(b)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(a).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(b)(2).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Under IRC &sect;&nbsp;1256(e).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(b).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(b)(2).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(d).<br /> <br /> </div></div><br />

<div class="Section1">Original issue discount (OID) is the difference between the issue price and the stated redemption price on a taxable corporate debt instrument having a maturity date of one year or less and is generally not included in income by a cash basis investor prior to sale or redemption.<a href="#_ftn1" name="_ftnref1">¹</a> Interest payable on such bonds is generally not included in income by a cash basis taxpayer until it is received. However, a cash basis investor may elect to include original issue discount as it accrues. Such an election may not be limited to a particular obligation but applies to all short-term taxable corporate obligations (and to Treasury bills with respect to acquisition discount) acquired on or after the first day of the first taxable year for which the election is made, and it continues to apply until the Service consents to revocation of the election.<a href="#_ftn2" name="_ftnref2">²</a> If a taxpayer elects to include discount as it accrues, he or she must also include stated interest (not otherwise included in income until it is paid) as it accrues.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> The taxpayer making the election must include as income an amount equal to the sum of the daily portions of original issue discount (in the case of T-bills, daily portions of acquisition discount) for each day that the taxpayer held the obligation in the tax year.<br /> <br /> An irrevocable election may be made, on an obligation-by-obligation basis, to determine the amount of original issue discount by using daily compounding at a constant interest rate.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Rather than electing to include original issue discount as it accrues, a taxpayer may elect to include &ldquo;acquisition discount&rdquo; (the difference between the stated redemption price at maturity and the basis in the obligation) as it accrues.<a href="#_ftn5" name="_ftnref5">⁵</a> The manner in which acquisition discount accrues is discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7625">7625</a>.The election to accrue acquisition discount applies to all such obligations (and Treasury bills) acquired by the taxpayer on or after the first day of the first taxable year to which the election applies and thereafter until the Service consents to a revocation.<br /> <br /> Certain investors <em>must</em> include original issue discount (or, by election, acquisition discount) in income prior to sale or other disposition of corporate short-term taxable obligations. They must also include interest payable on the obligation as it accrues.<a href="#_ftn6" name="_ftnref6">⁶</a> The mandatory inclusion rules apply to obligations if they are: (1) held by accrual basis taxpayers; (2) held by a bank; (3)&nbsp;held by a regulated investment company (RIC) or common trust fund; (4) held as inventory; (5)&nbsp;identified as part of a hedging transaction;<a href="#_ftn7" name="_ftnref7">⁷</a> or (6) held by a pass-through entity (e.g., a trust, partnership or S corporation) formed or availed of to avoid the mandatory inclusion rule, or a pass-through entity in any year in which taxpayers who would be subject to the rule held 20&nbsp;percent or more of the value of the interests in the entity for 90 days or more.<a href="#_ftn8" name="_ftnref8">⁸</a> Discount must also be included in income as it accrues on a stripped bond or stripped coupon held by the person who stripped the bond or coupon or by a person whose basis is determined by reference to the basis in the hands of the person who stripped the bond or coupon (e.g., a person who receives it as a gift) (see &nbsp; Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7674">7674</a>).<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The basis of a short-term taxable corporate obligation is increased by amounts of accrued discount included in income prior to disposition or redemption.<a href="#_ftn10" name="_ftnref10">¹⁰</a> As to how gain or loss is treated upon disposition of corporate short-term taxable obligations with original issue discount when the taxpayer has not made an election to include discount as it accrues, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7628">7628</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1272(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;1282(b), 1283(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(a)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(4); Treas. Reg. &sect;&nbsp;1.1271-1(b)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(c)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(a).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Under IRC &sect;&nbsp;1256(e).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(b).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1281(b)(1)(F).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(d).<br /> <br /> </div></div><br />

<div class="Section1">T-bills are capital assets.<a href="#_ftn1" name="_ftnref1">¹</a> On sale or maturity of the bill, the seller recovers the tax basis (generally cost plus broker&rsquo;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.<a href="#_ftn2" name="_ftnref2">²</a> (Generally, the gain is short-term because the holding period for short-term gain is one year or less.<a href="#_ftn3" name="_ftnref3">³</a> <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for the treatment of capital gains and losses.)<div class="Section1"><br /> <br /> 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&rsquo;s face value. (The difference between an individual&rsquo;s basis and the bill&rsquo;s face value is called &ldquo;acquisition discount.&rdquo;) 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.<a href="#_ftn4" name="_ftnref4">⁴</a> 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.<br /> <br /> 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.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> 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 (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7625">7625</a>).<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If instead of a gain, loss is realized on sale or maturity, it is a capital loss.<br /> <br /> 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.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The interest is exempt from all state and local income taxes.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> If a Treasury bill was held as part of a tax straddle, the additional rules and qualifications explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7593">7593</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7614">7614</a> apply; if a Treasury bill was held as part of a conversion transaction, the additional rules explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7615">7615</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7616">7616</a> apply.<br /> <br /> If the transfer is between spouses, or between former spouses incident to divorce, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="789">789</a>.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1221.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1222.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(3)(E); Treas. Reg. &sect;&nbsp;1.1271-1(b)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1283(d).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;453(k). <em><em>See</em></em> Rev. Rul. 93-84, 1993-2 CB 225.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; 31 U.S.C. &sect;&nbsp;3124.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1041.<br /> <br /> </div></div><br />

<div class="Section1">As a general rule, gain or loss is a capital gain or loss. However, gain on the sale or redemption of short-term corporate obligations is ordinary income up to the portion of the original issue discount allocable to the time the obligation was held by the taxpayer (and not included in income as it accrued).<a href="#_ftn1" name="_ftnref1">¹</a> Original issue discount (OID) is the difference between the stated redemption price and the issue price.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> The share of original issue discount allocable to the taxpayer is the amount that bears the same ratio to the total discount as the number of days the obligation was held to the number of days after the issue date, up to and including the date of maturity of the obligation. An irrevocable election may be made, on an obligation-by-obligation basis, to determine the amount using daily compounding at a constant interest rate.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Short-term corporate obligations are not subject to the market discount rules that require market discount to be treated as ordinary income on disposition.<a href="#_ftn4" name="_ftnref4">⁴</a> Therefore, any excess amount realized on sale after recovery of basis and original issue discount not previously included in income (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7627">7627</a>) is treated as capital gain.<a href="#_ftn5" name="_ftnref5">⁵</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a> regarding holding periods and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for the treatment of capital gains and losses.<br /> <br /> If the taxpayer has a loss resulting from a sale to a related person (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="701">701</a>), the loss may not be deducted or used to offset other capital gains.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If &ldquo;substantially identical&rdquo; securities are acquired within 30 days before or 30 days after a sale that results in a loss, the loss deduction will be disallowed under the wash sale rules (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7537">7537</a>), but the amount of loss disallowed is added to the basis of the new property.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The installment method for reporting gain is not available for securities traded on an<br /> 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<br /> year.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Generally, neither gain nor loss is recognized on a transfer between spouses, or between former spouses if incident to divorce (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="789">789</a>).<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Interest expenses and short sale expenses that were not deductible in the previous year because of the deferred taxability of the discount or interest (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8045">8045</a>) are deductible in the year the obligation is sold or redeemed, whether at a gain or loss.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> If a corporate obligation was held as part of a tax straddle, the additional rules and qualifications explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7593">7593</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7614">7614</a> apply. If a corporate obligation was held as part of a conversion transaction, the additional rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7615">7615</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7616">7616</a> apply.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1273(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(4); Treas. Reg. &sect;&nbsp;1.1271-1(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1278(a)(1)(B)(i).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(3)(A).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;267(a).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1091.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;453(k). <em><em>See</em></em> Rev. Rul. 93-84, 1993-2 CB 225.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1041.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1282(c).<br /> <br /> </div></div><br />