Yes, federally; no, for state and local income tax. The "interest" on a Treasury bill, the gap between the discounted price you pay and the face value you get back at maturity, is subject to federal income tax and exempt from state and local income taxes. IRS Publication 550 puts it in one sentence: interest from Treasury bills "is subject to federal income tax but is exempt from all state and local income taxes." A T-bill is not tax-free. It is free of one layer of tax.
The rest is detail: what the statute covers, which year the interest belongs to, what an early sale changes, where it is reported, and what an IRA does to all of it. This page states the general federal rules with their sources; applying them to your return is for you or your preparer. The basics, what a Treasury bill is and how discount pricing works, have their own page. No yield is printed here.
The short answer, tax by tax
| Tax | Treasury bill interest | Where it says so |
|---|---|---|
| Federal income tax | Taxed | IRS Publication 550; TreasuryDirect |
| State income tax | Exempt | 31 U.S.C. 3124(a); Publication 550 |
| Local income tax | Exempt | 31 U.S.C. 3124(a); Publication 550 |
| State estate or inheritance tax | Outside the exemption | 31 U.S.C. 3124(a)(2) |
| A state's nondiscriminatory franchise tax on a corporation | Outside the exemption | 31 U.S.C. 3124(a)(1) |
Treasury's retail site agrees, "What you earn from your Treasury marketable securities is subject to federal tax but is exempt from state and local taxes", and lists bill "interest" among those earnings. The table says nothing about federal estate or gift tax, a separate question this page does not cover.
What counts as the interest on a bill
A bill pays no coupon. You buy it below face value, or at face value if an auction prices it at par, and are paid face value at maturity, never more than a year later. The IRS: "The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income."
Interest income, then, not a capital gain, which matters most if you sell early. And the federal side belongs to the tax code: under 31 U.S.C. 3124(b), the tax status of interest on government obligations, and of gain or loss on disposing of them, "is decided under the Internal Revenue Code of 1986".
State and local income tax: what 31 U.S.C. 3124 says
The exemption is federal law, and its operative part is short enough to quote whole:
Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except—
(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation; and
(2) an estate or inheritance tax.
"Political subdivision of a State" is why local income taxes are covered as well as state ones. The reach is broad, "each form of taxation", and the exceptions are narrow: a corporation's nondiscriminatory franchise tax, or a non-property tax in its place, and a state estate or inheritance tax. Neither concerns an individual's income tax, where the IRS's wording holds.
On your state return
On the federal return, bill interest is taxable interest like any other. The exemption is applied on the state return, in whatever way that state's instructions provide. Form 1099-INT gives the amount its own box, and the form's instructions to the recipient say of box 3: "This interest is exempt from state and local income taxes. This interest is not included in box 1." This page describes no state's form; your state's return instructions do.
What the exemption is worth depends on your state's rate and on what else the money could earn. HYSA vs CD vs T-bills runs that after-tax comparison on illustrative numbers; it is not repeated here.
Which year the interest belongs to
Publication 550 starts from the cash method, "Most individual taxpayers use the cash method", under which interest is generally reported in the year you actually or constructively receive it, with special rules for the discount on certain debt instruments. For bills: "Generally, you report this interest income when the bill is paid at maturity." The tax code is more precise. For a federal obligation issued at a discount and maturing within a year, the discount "shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of" (26 U.S.C. 454(b)).
So for a cash-method individual who has not made the election below, a bill held to maturity across 31 December produces no income in the year it is bought; all of its discount lands in the year it matures. TreasuryDirect holds to that at the edge: a bill due on a 31 December that falls on a holiday or weekend is paid on the first business day of the new year, but the 1099-INT shows the payment "the day the bill matures, not the year it is paid."
An illustrative bill: issued in October, matures in April
| Illustrative 26-week bill | Figures |
|---|---|
| Face value | $10,000.00 |
| Term | 26 weeks (182 days) |
| Discount rate (illustrative, not a current rate) | 4.000% |
| Price per $100 | 97.977778 |
| Paid on the issue date, 15 October 2026 | $9,797.78 |
| Paid back at maturity, 15 April 2027 | $10,000.00 |
| Discount, which is the interest | $202.22 |
| Days of its life in 2026 / in 2027 | 77 / 105 |
| Interest on the 2026 federal return | $0.00 |
| Interest on the 2027 federal return | $202.22 |
The 4.000% is a round illustrative input; Treasury's published price formula turns it into 97.977778 per $100. The bill spends 77 of its 182 days in 2026, yet for a cash-method individual without the election none of its interest is on the 2026 return. All $202.22 is 2027 interest: taxable on the 2027 federal return, in box 3 of the 1099-INT for 2027, and exempt on that year's state and local returns. Real results are published by TreasuryDirect after every auction.
The election to report it as it accrues
For a short-term obligation, Publication 550 says, "you generally can choose to include any discount and interest payable on the obligation in income currently." Some holders must accrue, including accrual-basis taxpayers, banks and regulated investment companies. The choice is sticky: it "applies to all short-term obligations you acquire during the year and in all later years," and "You cannot change this choice without the consent of the IRS." Under it, part of the illustrative $202.22 would belong to 2026, figured by ratable accrual or constant yield. This page describes the choice and goes no further.
Rolling over does not postpone the tax
When you reinvest a maturing bill, Publication 550 says, you receive the difference between its proceeds and the new security's price, but "you must report the full amount of the interest income on each of your Treasury bills by the time it reaches maturity." Each bill in a chain of reinvestments has its own discount, reported for the year it matures.
US savings bonds are the useful contrast: they share the federal-yes, state-no treatment and box 3, but a cash-method owner of EE or I bonds can postpone reporting until the earlier of the year the bonds are cashed or disposed of and the year they mature, up to 30 years after issue.
Selling before maturity
Selling early goes through a bank, broker or dealer. A bill bought in TreasuryDirect must be held there 45 days before it can be sold or transferred out, so a 4-week bill bought there cannot be sold early at all, as the section on selling a T-bill before it matures sets out. The tax treatment comes from Publication 550 and 26 U.S.C. 1271:
- The gain is ordinary income, up to a limit. "Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount."
- Acquisition discount "is the stated redemption price at maturity minus your basis in the obligation": for a bill bought at auction, face value minus what you paid.
- Ratable share scales that discount by time: days held, over the days after acquisition up to and including maturity (26 U.S.C. 1271(a)(3)(D)), unless you elect a constant-interest-rate basis.
- No double counting. Discount already included in income under the election is not taxed again.
- The year is the year of sale, because under 454(b) the discount accrues when the bill is "sold, or otherwise disposed of".
Publication 550's general rule treats gain or loss on a debt instrument bought at a discount as capital "except as explained in the following discussions", and the short-term government rule is one of those exceptions. How a gain above the ratable share or a loss is treated is beyond this page, and so is how a state treats any gain on an early sale, which the sources used here do not settle.
A CD broken early forfeits interest, and the forfeit is deductible, as the CD penalty page explains. A bill has no penalty to deduct: it sells at the market price, and the tax follows the gain.
Illustrative: the same bill, sold in December
| Illustrative early sale | Figures |
|---|---|
| Paid on 15 October 2026 | $9,797.78 |
| Acquisition discount ($10,000.00 − $9,797.78) | $202.22 |
| Sold on 15 December 2026, no fee assumed | $9,860.00 |
| Days held / days from purchase to maturity | 61 / 182 |
| Ratable share ($202.22 × 61 ÷ 182) | $67.78 |
| Gain ($9,860.00 − $9,797.78) | $62.22 |
| Ordinary income on the 2026 return | $62.22 |
The sale price is invented; a real one is whatever the market pays on the day. Both day counts start the day after purchase: the 182 as the statute counts it, through the maturity date, and the 61 through the sale date, the way Publication 550 counts a holding period. The $62.22 gain sits within the $67.78 ratable share, so all of it is ordinary income, and because the sale was in 2026 it belongs to 2026, the year that would have shown nothing had the bill been held to April. The buyer has an acquisition discount of their own: $140.00, face value minus the $9,860.00 they paid.
Where it is reported: Form 1099-INT, box 3
The IRS tells payers to put Treasury bill interest in box 3, "Interest on U.S. Savings Bonds and Treasury Obligations": "Enter interest on U.S. Savings Bonds, Treasury bills, Treasury notes, and Treasury bonds. Do not include in box 1." Publication 550 tells the recipient to expect a 1099-INT "showing the interest (in box 3) paid to you for the year."
Where the form comes from depends on where the bill is held:
- In TreasuryDirect, one 1099 covers all your Treasury securities and appears in your account at the start of each year. It has a 1099-INT section for interest, a 1099-B section for "the proceeds you got for maturing securities not purchased at original issue" and a 1099-OID section for TIPS only. The account's "Taxable Transaction Summary" is, in TreasuryDirect's capitals, "NOT your 1099."
- In Legacy Treasury Direct, the 1099 is mailed.
- At a bank, broker or dealer, TreasuryDirect says: "Talk to them about tax forms and tax withholding."
One login change reaches the 1099: after 28 October 2026, ID.me is the only way to log in online, and without it you cannot view or download tax forms online. TreasuryDirect says funds and investments remain safe, and that TreasuryDirect Customer Support can mail you a copy of the current-year Form 1099 on request once the forms are available in January.
Optional withholding in TreasuryDirect
TreasuryDirect can withhold tax from bill interest at a percentage you set, "up to 50 percent of the interest you earn," and that year's 1099 shows what was withheld. That is separate from backup withholding, shown in box 4 of the 1099-INT, which a payer generally must apply if you did not give it your correct taxpayer identification number. One side effect of the optional kind: TreasuryDirect lists a withholding election among the reasons a new bill can cost more than the maturing one pays, and if the difference cannot be covered, the reinvestment is cancelled and the proceeds deposited instead. Two other ways to cover tax on income from outside a job, extra withholding from a paycheck and estimated tax, are on the withholding page, with the underpayment safe harbour.
Treasury bills inside an IRA
TreasuryDirect does not offer IRA registration; the entity account types it lists, from corporations to trusts, do not include one. If you hold bills inside an IRA elsewhere, the IRA's rules replace the ones above.
- Interest is generally not taxed as it is earned. "Although interest earned from your IRA is generally not taxed in the year earned, it isn't tax-exempt interest," says Publication 550, and payers are told: "Do not report tax-deferred interest, such as interest that is earned but not distributed from an IRA."
- What reaches your return is a distribution. "Distributions from traditional IRAs that you include in income are taxed as ordinary income." From a Roth IRA, qualified distributions are not included in gross income.
So the maturity-year rule, box 3 and the early-sale rule describe bills held outside an IRA; inside one, the wrapper decides. What is an IRA CD sets out the same split for a certificate: the account sets the tax rules, the holding sets the term. Traditional against Roth is on Roth vs traditional, and the yearly limits on 401(k) vs IRA.
Where to read the rules yourself
- IRS Publication 550, 2025 edition, under "U.S. Treasury Bills, Notes, and Bonds" and "Discount on Short-Term Obligations". Its list of bill terms is dated: it names five, where TreasuryDirect sells seven, from 4 to 52 weeks.
- 31 U.S.C. 3124, the exemption and its two exceptions.
- TreasuryDirect's tax forms page, for the 1099, withholding and the 31 December rule.
What this page leaves out
Any state's forms and lines; federal estate and gift tax; gains above the ratable share, and losses; the limit Publication 550 puts on deducting interest on money borrowed to buy or carry a short-term obligation; and holders it requires to accrue the discount, such as banks, regulated investment companies and accrual-basis taxpayers. Each turns on facts this page cannot see.
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