Taxation of Treasury bills, notes and bonds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Taxation of Treasury bills, notes and bonds

Post by Kevin M »

The purpose of this thread is to discuss the topic title. This is only relevant to taxable accounts, so if you hold all of your Treasuries in tax-advantaged accounts, this thread isn't relevant.

Let's start by looking at what TreasuryDirect says about it:
What you earn from your Treasury marketable securities is subject to federal tax but is exempt from state and local taxes. This includes:
  • interest you earn on notes, bonds, TIPS, and FRNs.
  • Bill "interest" (the difference between the price you pay and the face value you get when the bill matures)
  • inflation-protection gains or losses you may get during the year for a TIPS
IRS Form 1099 tells the IRS about interest and gains that may be subject to federal tax.
You get one 1099 for all your Treasury securities.

The 1099 has different sections for:
  • 1099 – INT (Shows interest income you received through the year)
  • 1099 – B (Shows the proceeds you got for maturing securities not purchased at original issue)
  • 1099 – OID (Only for TIPS: shows any inflation-adjusted increase or decrease in the principal)
Even though I'm quoting TD, I only buy marketable Treasuries from brokers, like Fidelity, Vanguard and Schwab. Brokers provide a consolidated 1099, like TD, and have separate sections for 1099-INT, 1099-OID, and 1099-B. Any examples I use will be from broker 1099s.

Treasury notes and bonds include TIPS, but from now on, I will use Treasury to refer to a nominal (non-TIPS) Treasury, and TIPS to refer to TIPS.

Note that series I and E savings bonds are not marketable Treasuries, so taxation of these is not a topic for this thread.

Let's look at the specifics of each type of Treasury.

Treasury bills are the easiest to understand. Say you pay $990 for $1,000 of face value (this is the minimum at a broker). At maturity you'll receive $1,000; $10 of this will be reported as interest in box 3 of 1099-INT for the year of maturity. IRS publications refer to this $10 as accrued acquisition discount.

Treasury bill interest (accrued acquisition discount) is exempt from state and local income tax, as is anything reported in box 3 of 1099-INT. All of this is true whether you buy at auction or on the secondary market.

Treasury notes and bonds are more complicated because they pay interest semi-annually (coupon payments), and there also can be a market discount or premium when you buy.

The coupon payments are reported on 1099-INT in box 3, which is for Treasury obligation interest. This is exempt from state and local income tax

The market discount or premium is accrued or amortized respectively.

Accrued market discount is reported by the broker as an adjustment to capital gains in box 1f of 1099-B for the year in which the security is disposed of (sold or matures). This accrued market discount is entered as interest by the tax preparer on Schedule B. There is some debate as to whether accrued market discount is exempt from state and local income tax. It may vary by state.

From Pub 550:
Market discount bonds.

Report the sale or trade of a market discount bond on Part I or Part II of Form 8949, whichever is appropriate. See the table How To Complete Form 8949, Columns (f) and (g), in the Instructions for Form 8949 to help you figure the amounts to report for a sale or trade of a market discount bond. Use the Worksheet for Accrued Market Discount Adjustment in Column (g) in those instructions to figure the adjusted accrued market discount. Also report the amount of accrued market discount as interest income on Schedule B (Form 1040), line 1, and identify it as “Accrued Market Discount.” See the Instructions for Form 8949 for more information.
One can make an election to report accrued market discount annually instead of at maturity. See IRS Pub 550 for details. From the Pub:
Choosing to include market discount in income currently.

You can make this choice if you have not revoked a prior choice to include market discount in income currently within the last 5 calendar years. Make the choice by attaching to your timely filed return a statement in which you:

State that you have included market discount in your gross income for the year under section 1278(b) of the Internal Revenue Code, and

Describe the method you used to figure the accrued market discount for the year.

Once you make this choice, it will apply to all market discount bonds you acquire during the tax year and in later tax years. You cannot revoke your choice without the consent of the IRS. See Rev. Proc. 2022-14 for information on how to revoke your election.
Bond premium can be amortized or reported in the year of disposition. From Pub 550:
Bond Premium Amortization

If you pay a premium to buy a bond, the premium is part of your basis in the bond. If the bond yields taxable interest, you can choose to amortize the premium. This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. If you make this choice, you must reduce your basis in the bond by the amortization for the year.
TIPS are inflation-adjusted Treasury notes and bonds. As the TD site says, the inflation adjustment is reported on 1099-OID. This is then reported on Schedule B, along with interest.

I have never done a tax return with TIPS in taxable, so I can't speak from experience on this yet. I will be doing tax returns with TIPS in taxable next year. I assume the real coupon payments are shown on 1099-INT, but maybe they also are reported on 1099-OID; I can't say from experience. From Pub 550:
Inflation-Indexed Debt Instruments

If you hold an inflation-indexed debt instrument (other than a Series I U.S. savings bond), you must report as OID any increase in the inflation-adjusted principal amount of the instrument that occurs while you held the instrument during the year. In general, an inflation-indexed debt instrument is a debt instrument on which the payments are adjusted for inflation and deflation (such as Treasury Inflation-Protected Securities). You should receive Form 1099-OID from the payer showing the amount you must report as OID and any qualified stated interest paid to you during the year. For more information, see Pub. 1212.
STRIPS are zero-coupon bonds where the principal and interest payments have been stripped from the note or bond and offered as separate securities. STRIPS interest is reported on 1099-OID. From Pub 550:
Stripped Bonds and Coupons

If you strip one or more coupons from a bond and sell the bond or the coupons, the bond and coupons are treated as separate debt instruments issued with OID.

The holder of a stripped bond has the right to receive the principal (redemption price) payment. The holder of a stripped coupon has the right to receive interest on the bond.
Buyer.

If you buy a stripped bond or stripped coupon, treat it as if it were originally issued on the date you buy it. If you buy a stripped bond, treat as OID any excess of the stated redemption price at maturity over your purchase price. If you buy a stripped coupon, treat as OID any excess of the amount payable on the due date of the coupon over your purchase price.
Kevin
Last edited by Kevin M on Wed Nov 16, 2022 4:04 am, edited 1 time in total.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
squirrel1963
Posts: 1161
Joined: Wed Jun 21, 2017 10:12 am
Location: Portland OR area

Re: Taxation of Treasury bills, notes and bonds

Post by squirrel1963 »

Thank you for starting this thread, it's very useful.
I'm still quite nebolous about reporting accrued interest paid for treasuries or TIPS bought on the secondary market. Could you elaborate on this?
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
ruud
Posts: 755
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Re: Taxation of Treasury bills, notes and bonds

Post by ruud »

Kevin M wrote: Tue Nov 15, 2022 8:26 pm Treasury bills are the easiest to understand. Say you pay $990 for $1,000 of face value (this is the minimum at a broker). At maturity you'll receive $10,000; $10 of this will be reported as interest in box 3 of 1099-INT for the year of maturity. IRS publications refer to this $10 as accrued acquisition discount.
I assume you meant $1,000 instead of $10,000 there.

How does this work for Treasury Bills bought late in the year that mature the subsequent year? What year(s) is the interest taxable in?
.
nalor511
Posts: 3143
Joined: Mon Jul 27, 2015 1:00 am

Re: Taxation of Treasury bills, notes and bonds

Post by nalor511 »

ruud wrote: Tue Nov 15, 2022 10:15 pm
Kevin M wrote: Tue Nov 15, 2022 8:26 pm Treasury bills are the easiest to understand. Say you pay $990 for $1,000 of face value (this is the minimum at a broker). At maturity you'll receive $10,000; $10 of this will be reported as interest in box 3 of 1099-INT for the year of maturity. IRS publications refer to this $10 as accrued acquisition discount.
I assume you meant $1,000 instead of $10,000 there.

How does this work for Treasury Bills bought late in the year that mature the subsequent year? What year(s) is the interest taxable in?
Taxable in the year of maturity
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

ruud wrote: Tue Nov 15, 2022 10:15 pm
Kevin M wrote: Tue Nov 15, 2022 8:26 pm Treasury bills are the easiest to understand. Say you pay $990 for $1,000 of face value (this is the minimum at a broker). At maturity you'll receive $10,000; $10 of this will be reported as interest in box 3 of 1099-INT for the year of maturity. IRS publications refer to this $10 as accrued acquisition discount.
I assume you meant $1,000 instead of $10,000 there.

How does this work for Treasury Bills bought late in the year that mature the subsequent year? What year(s) is the interest taxable in?
Thanks! Fixed.

T bill interest is taxable for the year in which the bill is disposed (sold or matured).
If I make a calculation error, #Cruncher probably will let me know.
acegolfer
Posts: 2859
Joined: Tue Aug 25, 2009 9:40 am

Re: Taxation of Treasury bills, notes and bonds

Post by acegolfer »

Kevin M wrote: Tue Nov 15, 2022 8:26 pm Accrued market discount is reported by the broker as an adjustment to capital gains in box 1f of 1099-B for the year in which the security is disposed of (sold or matures). This accrued market discount is entered as interest by the tax preparer on Schedule B. There is some debate as to whether accrued market discount is exempt from state and local income tax. It may vary by state.
How is this debatable, when 1099-B displayed it as "interest." Shouldn't It be treated just like any "interest" in 1099-INT?
User avatar
Tubes
Posts: 1436
Joined: Wed Apr 22, 2020 6:33 am

Re: Taxation of Treasury bills, notes and bonds

Post by Tubes »

I was new to Notes, so I was surprised to get a 1099-B. Since rates were near zero, the number was tiny so I didn't consider the state tax exemption.

One other thing. Treasury Direct's 1099-B is terrible. They don't provide a PDF. You print from the web and the numbers may run together. The brokerages provide much more readable tax info. Another reason I've moved to brokerages for Treasury products.
mystupidglasses
Posts: 61
Joined: Tue Sep 15, 2015 4:52 pm

Re: Taxation of Treasury bills, notes and bonds

Post by mystupidglasses »

This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
acegolfer
Posts: 2859
Joined: Tue Aug 25, 2009 9:40 am

Re: Taxation of Treasury bills, notes and bonds

Post by acegolfer »

mystupidglasses wrote: Wed Nov 16, 2022 7:29 am This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
Most of it should be categorized as interest income. I believe Vanguard will correctly calculate accrued market discount and include it in 1099.
mystupidglasses
Posts: 61
Joined: Tue Sep 15, 2015 4:52 pm

Re: Taxation of Treasury bills, notes and bonds

Post by mystupidglasses »

acegolfer wrote: Wed Nov 16, 2022 11:13 am Most of it should be categorized as interest income. I believe Vanguard will correctly calculate accrued market discount and include it in 1099.
Thanks for your reply. This is my first experience with t-bills.
User avatar
HueyLD
Posts: 9294
Joined: Mon Jan 14, 2008 10:30 am

Re: Taxation of Treasury bills, notes and bonds

Post by HueyLD »

acegolfer wrote: Wed Nov 16, 2022 11:13 am
mystupidglasses wrote: Wed Nov 16, 2022 7:29 am This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
Most of it should be categorized as interest income. I believe Vanguard will correctly calculate accrued market discount and include it in 1099.
Just to add to Acegolfer’s comment. The best place to find answer to such questions is IRS Pub 550. It says:

“ Discount on Short-Term Obligations

When you buy a short-term obligation (one with a fixed maturity date of 1 year or less from the date of issue), other than a tax-exempt obligation, you generally can choose to include any discount and interest payable on the obligation in income currently. If you do not make this choice, the following rules generally apply.

You must treat any gain when you sell, exchange, or redeem the obligation as ordinary income, up to the amount of the ratable share of the discount.”
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

acegolfer wrote: Wed Nov 16, 2022 4:56 am
Kevin M wrote: Tue Nov 15, 2022 8:26 pm Accrued market discount is reported by the broker as an adjustment to capital gains in box 1f of 1099-B for the year in which the security is disposed of (sold or matures). This accrued market discount is entered as interest by the tax preparer on Schedule B. There is some debate as to whether accrued market discount is exempt from state and local income tax. It may vary by state.
How is this debatable, when 1099-B displayed it as "interest." Shouldn't It be treated just like any "interest" in 1099-INT?
The 1099-B doesn't show it as interest, but as accrued market discount, which is not included in the reported capital gain. The question is whether or not to treat the accrued market discount as Treasury interest, which is reported in box 3 of 1099-INT for stated interest (e.g., coupon payments), or as non-Treasury interest, which is reported in box 1 for "Interest income".

The way I've done this with tax software is to create a dummy 1099-INT and enter the interest in it. You would enter it into either box 1 or box 3 of the dummy 1099-INT, depending on whether or not the accrued interest is exempt from state and local income tax. As I recall, I entered it in box 3. I am a CA resident.

Looking at my 2019 1099s, I see that Schwab and Fidelity report it slightly differently.

Image

Schwab shows the unadjusted basis, and subtracts accrued market discount to get the gain/loss. Fidelity shows the adjusted basis (accrued market discount added to basis), so gain/loss = proceeds - basis.

In any case, you need to make sure your tax software handles it correctly, and that the adjusted basis (cost + accrued market discount) is used to calculate the reported gain/loss. Then you need to do something to get the accrued market discount onto Schedule B, which is what I use the dummy 1099-INT for.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HueyLD wrote: Wed Nov 16, 2022 11:42 am
acegolfer wrote: Wed Nov 16, 2022 11:13 am
mystupidglasses wrote: Wed Nov 16, 2022 7:29 am This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
Most of it should be categorized as interest income. I believe Vanguard will correctly calculate accrued market discount and include it in 1099.
Just to add to Acegolfer’s comment. The best place to find answer to such questions is IRS Pub 550. It says:

“ Discount on Short-Term Obligations

When you buy a short-term obligation (one with a fixed maturity date of 1 year or less from the date of issue), other than a tax-exempt obligation, you generally can choose to include any discount and interest payable on the obligation in income currently. If you do not make this choice, the following rules generally apply.

You must treat any gain when you sell, exchange, or redeem the obligation as ordinary income, up to the amount of the ratable share of the discount.”
I have never made any elections other than accepting whatever the broker includes on the 1099s. I think maybe I was supposed to attach something to my return in the first year I ever included any accrued market discount as interest, but I don't recall doing that--it was many years ago though. At any rate, according to the above quote, since I did not make the choice, I go with the defaults, which is what my brokers have reported.

Technically there is no accrued market discount on bills, because they are not considered "market discount bonds" (see Pub 550). The bill discount is referred to in Pub 550 as acquisition discount, and is reported as interest in box 3 of 1099-INT.
Government obligations.

For an obligation described above that is a short-term government obligation, the amount you include in your income for the current year is the accrued acquisition discount, if any, plus any other accrued interest payable on the obligation. The acquisition discount is the stated redemption price at maturity minus your basis.
The context of this is that it applies if you have made the election to include accrued market discount in income currently.

Image

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Klewles
Posts: 105
Joined: Thu Sep 05, 2019 3:37 am

Re: Taxation of Treasury bills, notes and bonds

Post by Klewles »

Kevin M wrote: Wed Nov 16, 2022 1:25 pm I have never made any elections other than accepting whatever the broker includes on the 1099s. I think maybe I was supposed to attach something to my return in the first year I ever included any accrued market discount as interest, but I don't recall doing that--it was many years ago though. At any rate, according to the above quote, since I did not make the choice, I go with the defaults, which is what my brokers have reported.
Here is Fidelity's form for instructing broker on how to handle 1099 reporting:
https://www.fidelity.com/bin-public/060 ... ctions.pdf
By default, broker reports market discount as not being recognized in current income, meaning it's reported only on the 1099-B that you get when you sell or redeem the bond. This default is specified in tax law, so should be the same for all brokers.

Just to be clear, the example here shows accrued interest, not accrued market discount. Accrued interest is the portion of the upcoming coupon payment that the buyer pays to the seller when the bond is sold between coupon payment dates. It is taxable to the seller in the year of the sale and deductible to the buyer in the year of the coupon payment.
Image
moneyflowin
Posts: 193
Joined: Sat Oct 16, 2021 6:14 am

Re: Taxation of Treasury bills, notes and bonds

Post by moneyflowin »

mystupidglasses wrote: Wed Nov 16, 2022 7:29 am This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
It's both interest and capital gains(loss). It could be $22 interest and $3 cap gains, or $27 interest and $2 cap loss. There's a very low likelihood it will be all interest or all cap gains.

You'll have to figure it out yourself (see Pub 550) then make adjustments to Schedule B and Schedule D. Some tax software might calculate it for you, but I know HR Block doesn't (HR Block is inexpensive for a reason). Vanguard may issue a 1099B that reports all $25 as s/t capital gains, but it will be wrong. IME, brokers do not calculate correctly the interest and cap gains if you sell before maturity. I've always had to figure it out myself

Next year when you do taxes, you'll regret having sold the T-bill before maturity.
User avatar
HueyLD
Posts: 9294
Joined: Mon Jan 14, 2008 10:30 am

Re: Taxation of Treasury bills, notes and bonds

Post by HueyLD »

With so many first timers investing in individual treasuries, I expect a tsunami of related tax questions between 2/1 and 4/15/2023.

It may be a good idea for them to start studying IRS Pub 550 and Pub 1212 a few months ahead of time. Good luck.
cas
Posts: 1860
Joined: Wed Apr 26, 2017 8:41 am

Re: Taxation of Treasury bills, notes and bonds

Post by cas »

Kevin M wrote: Wed Nov 16, 2022 1:07 pm The 1099-B doesn't show it as interest, but as accrued market discount, which is not included in the reported capital gain. The question is whether or not to treat the accrued market discount as Treasury interest [. . .]

The way I've done this with tax software is to create a dummy 1099-INT and enter the interest in it. You would enter it into either box 1 or box 3 of the dummy 1099-INT, depending on whether or not the accrued interest is exempt from state and local income tax. [ . . .]
I'm not sure what tax software Kevin M is using, but I got curious on how Turbotax would deal with Treasury accrued market discount, so I did a little 10 minute test run on a model return using desktop Turbotax 2021. Other people with more on the line may want to do a more thorough test.

Conclusions:

Federal return: No dummy 1099-INT is needed, but you do have to tickle Turbotax the right way in order to get it to report the accrued market discount as interest on to the Schedule B. (For this particular situation, it kind of looks like attempting a dummy 1099-INT would just muck up the Turbotax works?) See this Turbotax Community post for one screenshot/discussion of how it is done: 1099-B, Summarized sales category, No way to enter Box 1f

The interface I encountered when I hand entered a single test 1099-B entry was a little different than the above screenshot. It didn't mention anything about Box 1f, but it did give me a checkbox list of possible adjustments and "Accrued Market Discount" was on there. Click that box, enter the appropriate $ accrued market discount and "poof" ... the amount disappeared off the Form 8949/Schedule D and reappeared as a line on Schedule B (the line on Schedule B showed the name of the bond with the words "Accrued Market Discount" appended, and the appropriate $ amount.)

State return: People are going to be unhappy to hear this, but Turbotax appeared to completely punt on what to do about accrued market discount on the state return for my state.

I don't want to get into the whole issue, discussed in other threads, of whether accrued market discount is or is not "treasury interest" that can be deducted on a state return. I'm just saying what Turbotax did which was ... apparently punt to the user of the software:
  • It did NOT ask whether the accrued market discount was associated with a Treasury and it did NOT automatically deduct it from the state return
  • I didn't find any area in the "interview" mode for the state tax return that seemed to have anythng to do with dealing with income from US Government Obligations.
  • However, I could go into Forms mode on the state return, go to the line on the state return where the adjustment for Treasury interest is entered, click down to a worksheet, and Turbotax showed two items for that line.

    The first item was not changable and showed interest officially designated as Treasury interest on some federal tax reporting form (e.g. Box 3 of 1099-INT.)

    The second item *was* changeable, said something like (I forgot to write down the exact wording) "Other interest from US Government Obligations that is deductible under <my state> state law and is not accounted for in the previous line". Click there, and it brought you yet another worksheet where you entered a description and amount. And,then, "poof" ... that amount was added to the line for US Government Obligation interest on the state tax return and deducted from state income.

    But that looked very much to be Turbotax punting and putting all the burden on the taxpayer to figure out and being liable to their own state tax authorities on how to deal with Treasury accrued market discount on the state tax return. I have no idea if the online version of Turtotax, which I don't think has a Forms mode, is even capable of the above maneuver.

    There is a Turbotax Community thread on this issue (for the state of Illinois, specifically). But it isn't very helpful, because no one seemed to get the specific issue the question writer was getting at (specifically about Treasury accrued market discount.). I mention it only as an example of someone outside the Boglehead's forum saying "Hey ... I think I should be getting a state deduction and Turbotax ain't doing it."

    Turbotax Community thread: accrued US Treasuries discount handling on IL state tax
My test of Turbotax was very high level and superficial, because I don't currently own any treasuries that are going to produce accrued market discount in taxable. Plus, Turbotax might or might not have different functionality for different state returns.

People who have more at stake may want to do a more thorough test and report back here. (I'm with HueyLD ... I've got a bad feeling about all the first timers investing in individual treasuries combined with situations where I find myself saying that tax software has to be "tickled properly" (and Kevin M is talking about "dummy 1099-INTs") to get the tax reporting done.)
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Klewles wrote: Thu Nov 17, 2022 3:50 am Just to be clear, the example here shows accrued interest, not accrued market discount. Accrued interest is the portion of the upcoming coupon payment that the buyer pays to the seller when the bond is sold between coupon payment dates. It is taxable to the seller in the year of the sale and deductible to the buyer in the year of the coupon payment.
To be really clear, the screenshot was to demonstrate that Treasury bill accrued acquisition discount is included in box 3 of 1099-INT, which is what the text preceding the screenshot says. I should've just clipped the screenshot to show this, but showing that it's reported in the same box as accrued interest for notes doesn't hurt our understanding.
Image
Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

moneyflowin wrote: Thu Nov 17, 2022 4:47 am
mystupidglasses wrote: Wed Nov 16, 2022 7:29 am This year, I bought a 6-month T-Bill and sold it a few months later, prior to maturity, for a small gain (but $25 less than face value). Vanguard seems to be treating this as a short-term capital gain (rather than as interest). How should I expect this to be treated on my tax return? Interest or capital gain? It is interesting because if it is reported as STCG, then there is no tax owed because it gets absorbed by TLH activity this year. Thank you.
It's both interest and capital gains(loss). It could be $22 interest and $3 cap gains, or $27 interest and $2 cap loss. There's a very low likelihood it will be all interest or all cap gains.

You'll have to figure it out yourself (see Pub 550) then make adjustments to Schedule B and Schedule D. Some tax software might calculate it for you, but I know HR Block doesn't (HR Block is inexpensive for a reason). Vanguard may issue a 1099B that reports all $25 as s/t capital gains, but it will be wrong. IME, brokers do not calculate correctly the interest and cap gains if you sell before maturity. I've always had to figure it out myself

Next year when you do taxes, you'll regret having sold the T-bill before maturity.
It's not that bad. I didn't have any USGO at Vanguard in 2019, but I've shown how Fidelity and Schwab reported it, and I've shared how I handled it in tax software--I use H&R Block. I did own a bunch of individual munis in 2019 too, and there was only 1 case where the amortized bond premium did not match my calculations, and it was close enough not to worry about.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HueyLD wrote: Thu Nov 17, 2022 7:02 am With so many first timers investing in individual treasuries, I expect a tsunami of related tax questions between 2/1 and 4/15/2023.

It may be a good idea for them to start studying IRS Pub 550 and Pub 1212 a few months ahead of time. Good luck.
I started this thread so we could get a jump on it. We're already seeing daily posts on Treasury tax questions, which is what motivated me to start the thread.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
LilyFleur
Posts: 2824
Joined: Fri Mar 02, 2018 10:36 pm

Re: Taxation of Treasury bills, notes and bonds

Post by LilyFleur »

My tax returns already exceed 100 pages.

I am going to be setting up a T-bill ladder soon, through Schwab.

If I hold the T-bills until maturity, will I avoid these complications?

I do my own taxes, and I'm fine with the usual Schwab brokerage account 1099.

But this... :oops: :shock: :confused
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

LilyFleur wrote: Thu Nov 17, 2022 1:30 pm My tax returns already exceed 100 pages.

I am going to be setting up a T-bill ladder soon, through Schwab.

If I hold the T-bills until maturity, will I avoid these complications?

I do my own taxes, and I'm fine with the usual Schwab brokerage account 1099.

But this... :oops: :shock: :confused
Yes. All T-bill interest is reported in box 3 of 1099-INT, USGO interest income. If you hold to maturity, there is no capital gain or loss.

Notes and bonds are a different matter, since there is accrued market discount or amortized bond premium to deal with.
If I make a calculation error, #Cruncher probably will let me know.
moneyflowin
Posts: 193
Joined: Sat Oct 16, 2021 6:14 am

Re: Taxation of Treasury bills, notes and bonds

Post by moneyflowin »

Kevin M wrote: Thu Nov 17, 2022 1:38 pm
LilyFleur wrote: Thu Nov 17, 2022 1:30 pm My tax returns already exceed 100 pages.

I am going to be setting up a T-bill ladder soon, through Schwab.

If I hold the T-bills until maturity, will I avoid these complications?

I do my own taxes, and I'm fine with the usual Schwab brokerage account 1099.

But this... :oops: :shock: :confused
Yes. All T-bill interest is reported in box 3 of 1099-INT, USGO interest income. If you hold to maturity, there is no capital gain or loss.

Notes and bonds are a different matter, since there is accrued market discount or amortized bond premium to deal with.
For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

moneyflowin wrote: Thu Nov 17, 2022 4:46 pm
Kevin M wrote: Thu Nov 17, 2022 1:38 pm
LilyFleur wrote: Thu Nov 17, 2022 1:30 pm My tax returns already exceed 100 pages.

I am going to be setting up a T-bill ladder soon, through Schwab.

If I hold the T-bills until maturity, will I avoid these complications?

I do my own taxes, and I'm fine with the usual Schwab brokerage account 1099.

But this... :oops: :shock: :confused
Yes. All T-bill interest is reported in box 3 of 1099-INT, USGO interest income. If you hold to maturity, there is no capital gain or loss.

Notes and bonds are a different matter, since there is accrued market discount or amortized bond premium to deal with.
For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
Right, but I'm not going to let the tax tail wag the portfolio construction dog.

I am buying only TIPS with less than five years to maturity. Can't do that at auction.

I've been buying Treasuries daily with various maturities with settlement the next trade day--can't do that at auction. Tax reporting for bills bought on secondary market and held to maturity is trivial, as all interest (accrued acquisition discount) is reported in box 3 of 1099-INT.

Finally, I might sell before maturity if a better alternative exists at the time.

If all you do is buy at auction and hold to maturity, you probably aren't very interested in this thread.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
LilyFleur
Posts: 2824
Joined: Fri Mar 02, 2018 10:36 pm

Re: Taxation of Treasury bills, notes and bonds

Post by LilyFleur »

Kevin M wrote: Thu Nov 17, 2022 5:02 pm
moneyflowin wrote: Thu Nov 17, 2022 4:46 pm
Kevin M wrote: Thu Nov 17, 2022 1:38 pm
LilyFleur wrote: Thu Nov 17, 2022 1:30 pm My tax returns already exceed 100 pages.

I am going to be setting up a T-bill ladder soon, through Schwab.

If I hold the T-bills until maturity, will I avoid these complications?

I do my own taxes, and I'm fine with the usual Schwab brokerage account 1099.

But this... :oops: :shock: :confused
Yes. All T-bill interest is reported in box 3 of 1099-INT, USGO interest income. If you hold to maturity, there is no capital gain or loss.

Notes and bonds are a different matter, since there is accrued market discount or amortized bond premium to deal with.
For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
Right, but I'm not going to let the tax tail wag the portfolio construction dog.

I am buying only TIPS with less than five years to maturity. Can't do that at auction.

I've been buying Treasuries daily with various maturities with settlement the next trade day--can't do that at auction. Tax reporting for bills bought on secondary market and held to maturity is trivial, as all interest (accrued acquisition discount) is reported in box 3 of 1099-INT.

Finally, I might sell before maturity if a better alternative exists at the time.

If all you do is buy at auction and hold to maturity, you probably aren't very interested in this thread.

Kevin
:sharebeer
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin---Thank you for starting this thread. I will be following closely as this has been my first year purchasing Treasury bills and notes.

I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?

I am asking because I am trying to project my tax liability for this year before the end of the year.

Many thanks.
User avatar
BrandonBogle
Posts: 4393
Joined: Mon Jan 28, 2013 11:19 pm

Re: Taxation of Treasury bills, notes and bonds

Post by BrandonBogle »

Kevin M wrote: Thu Nov 17, 2022 1:38 pm Yes. All T-bill interest is reported in box 3 of 1099-INT, USGO interest income. If you hold to maturity, there is no capital gain or loss.
I glad to hear this. I got my feet wet with T-bills today and bought two at Fidelity, one new issue and one secondary. I plan to hold to maturity, so it sounds like it will be a decently easy on my tax return.
User avatar
Klewles
Posts: 105
Joined: Thu Sep 05, 2019 3:37 am

Re: Taxation of Treasury bills, notes and bonds

Post by Klewles »

moneyflowin wrote: Thu Nov 17, 2022 4:46 pm For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
That will work. One caveat is that Treasury auctions are sometimes reopenings of existing issues, and these can result in market discount. Case in point: Thursday's (11/17) auction of a 10-year TIPS originally issued in July resulted in a discount of about 8%. IRS treats this as market discount, not OID, even though you're buying a new bond directly from Treasury. See this post.

Thanks to Kevin M for starting this thread and to the contributors. I've been buying TIPS for over a decade but only at auction. Trying to get the confidence to start buying on secondary.
MikeG62
Posts: 4764
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Taxation of Treasury bills, notes and bonds

Post by MikeG62 »

cas wrote: Thu Nov 17, 2022 10:26 am
...State return: People are going to be unhappy to hear this, but Turbotax appeared to completely punt on what to do about accrued market discount on the state return for my state.

I don't want to get into the whole issue, discussed in other threads, of whether accrued market discount is or is not "treasury interest" that can be deducted on a state return. I'm just saying what Turbotax did which was ... apparently punt to the user of the software:
  • It did NOT ask whether the accrued market discount was associated with a Treasury and it did NOT automatically deduct it from the state return
  • I didn't find any area in the "interview" mode for the state tax return that seemed to have anythng to do with dealing with income from US Government Obligations.
  • However, I could go into Forms mode on the state return, go to the line on the state return where the adjustment for Treasury interest is entered, click down to a worksheet, and Turbotax showed two items for that line.

    The first item was not changable and showed interest officially designated as Treasury interest on some federal tax reporting form (e.g. Box 3 of 1099-INT.)

    The second item *was* changeable, said something like (I forgot to write down the exact wording) "Other interest from US Government Obligations that is deductible under <my state> state law and is not accounted for in the previous line". Click there, and it brought you yet another worksheet where you entered a description and amount. And,then, "poof" ... that amount was added to the line for US Government Obligation interest on the state tax return and deducted from state income.

    But that looked very much to be Turbotax punting and putting all the burden on the taxpayer to figure out and being liable to their own state tax authorities on how to deal with Treasury accrued market discount on the state tax return. I have no idea if the online version of Turtotax, which I don't think has a Forms mode, is even capable of the above maneuver.
This is very helpful actually.

I said in another thread that this is something I will deal with when preparing my tax return (using TT). Want to see how the info is imported by TT and how TT handles the amortization of the market discount. Your comments align with that I am expecting - users may have to make some adjustments.

BTW, I made the election to take that into income annually (and not all at once upon maturity). Don't know if that impacts how things are reported. I am interested to see how this all plays out.

In my state (NJ), it seems the accrued market discount on Treasuries is not taxable. I posted a link to a document from the state of NJ which appears to support this fact (well it specifically says capital gains on Treasuries are exempt from NJ income tax).

Lastly, thanks to Kevin for starting this separate thread.
Real Knowledge Comes Only From Experience
cas
Posts: 1860
Joined: Wed Apr 26, 2017 8:41 am

Re: Taxation of Treasury bills, notes and bonds

Post by cas »

HereToLearn wrote: Thu Nov 17, 2022 10:25 pm I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?
It is a separate line item on the purchase confirmation that your brokerage produced when you bought the treasury. If you didn't pull the confirmation and put in your tax records already, that purchase confirmation should be available somewhere on your brokerage's website.
I am asking because I am trying to project my tax liability for this year before the end of the year.
The "this year" part is where it gets a bit complicated.

The issue is that treasury bonds/notes pay interest every 6 months. They pay the whole 6 months interest to the person who owns the treasury at the time the interest is paid. So, your 1099-INT will include the whole 6 months interest, even if you bought the treasury part way through the 6 months period and had to pay the seller of the bond part of that interest.

Quite reasonably, you may say "Hey! It isn't fair that I have to pay tax on interest that I had to give to someone else." The IRS agrees, and lets you subtract the "accrued interest paid to seller" on your Schedule B. From IRS Publication 550 (reformatted a bit by me)
If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates...
  • include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1.
  • Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you.
  • Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
Two complications here:

Complication 1)

The accrued interest paid to seller is NOT on the 1099-INT and will NOT import automatically into your tax software (or be obvious to your paid tax preparer.) You will have to remember to make a manual adjustment in your tax software (or specifically alert your paid tax preparer). In Turbotax this manual adjustment is fairly straightforward:
  • Click on the specific 1099-INT you imported.
  • Click "Continue" on the page showing all the specific 1099-INT box entries
  • Click "Continue" on the page with the question about the financial institution's FEIN
  • On the page that says "Tell us if any of these uncommon situations apply," check the checkbox that says "We need to adjust the taxable amount" and "Continue"
  • Enter the amount and click the checkbox that says "My accrued interest is included in this Form 1099-INT"
  • Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries. (And, correspondingly, accrued interest paid to seller for, say, brokered CDs, on the dummy 1099-INT for non-US Government obligations.) Probably none of this is relevant if you live in a state with no state income tax.
  • Turbotax will then properly handle printing the required "Accrued Interest" wording in the right place on the Schedule B and doing the needed subtraction and carrying forward the right amount of Treasury interest to be deducted on the state tax return.
All of the above sounds more complicated than it is. It is just a few click-click-clicks, unless you get into the situation of needing to create the multiple dummy 1099-INTs. The hard part is ***remembering to do it.***

Complication 2: Figuring out what year's tax return to do all of the above upon.

The IRS doesn't want you subtracting the "accrued interest paid to seller" from your income until the tax year when you actually received the 6 months worth of interest to which it corresponds.

Example 1: In September 2022, you buy a treasury note on the secondary market that pays interest in April and October. You receive your first interest payment from this note in October 2022.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2022* federal tax return (due April 2023).

Example 2: In September 2022, you buy a treasury note on the secondary market that pays interest in February and August. Therefore, you don't receive your first interest payment from this note until February *2023*.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2023* federal tax return (due April *2024*).

(For more information on this tax year complication see previous Boglehead's thread: Reporting Accrued Bond Interest Paid

My recommendation:
  • Pull, from your brokerage website, the brokerage confirmation for each treasury note/bond that you bought on the secondary market
  • Circle the line item showing the accrued interest paid to seller
  • Look at the description of the bond (look for what month it was *originally* issued) and write a note on when (month/year) *you* will first receive interest from this treasury
  • Write a note to yourself reminding yourself what needs to be done with the accrued interest paid to seller
  • Stick the whole thing in your tax folder for the *appropriate tax year* as a memory jog.
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

cas wrote: Fri Nov 18, 2022 10:38 am
HereToLearn wrote: Thu Nov 17, 2022 10:25 pm I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?
It is a separate line item on the purchase confirmation that your brokerage produced when you bought the treasury. If you didn't pull the confirmation and put in your tax records already, that purchase confirmation should be available somewhere on your brokerage's website.
I am asking because I am trying to project my tax liability for this year before the end of the year.
The "this year" part is where it gets a bit complicated.

The issue is that treasury bonds/notes pay interest every 6 months. They pay the whole 6 months interest to the person who owns the treasury at the time the interest is paid. So, your 1099-INT will include the whole 6 months interest, even if you bought the treasury part way through the 6 months period and had to pay the seller of the bond part of that interest.

Quite reasonably, you may say "Hey! It isn't fair that I have to pay tax on interest that I had to give to someone else." The IRS agrees, and lets you subtract the "accrued interest paid to seller" on your Schedule B. From IRS Publication 550 (reformatted a bit by me)
If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates...
  • include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1.
  • Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you.
  • Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
Two complications here:

Complication 1)

The accrued interest paid to seller is NOT on the 1099-INT and will NOT import automatically into your tax software (or be obvious to your paid tax preparer.) You will have to remember to make a manual adjustment in your tax software (or specifically alert your paid tax preparer). In Turbotax this manual adjustment is fairly straightforward:
  • Click on the specific 1099-INT you imported.
  • Click "Continue" on the page showing all the specific 1099-INT box entries
  • Click "Continue" on the page with the question about the financial institution's FEIN
  • On the page that says "Tell us if any of these uncommon situations apply," check the checkbox that says "We need to adjust the taxable amount" and "Continue"
  • Enter the amount and click the checkbox that says "My accrued interest is included in this Form 1099-INT"
  • Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries. (And, correspondingly, accrued interest paid to seller for, say, brokered CDs, on the dummy 1099-INT for non-US Government obligations.) Probably none of this is relevant if you live in a state with no state income tax.
  • Turbotax will then properly handle printing the required "Accrued Interest" wording in the right place on the Schedule B and doing the needed subtraction and carrying forward the right amount of Treasury interest to be deducted on the state tax return.
All of the above sounds more complicated than it is. It is just a few click-click-clicks, unless you get into the situation of needing to create the multiple dummy 1099-INTs. The hard part is ***remembering to do it.***

Complication 2: Figuring out what year's tax return to do all of the above upon.

The IRS doesn't want you subtracting the "accrued interest paid to seller" from your income until the tax year when you actually received the 6 months worth of interest to which it corresponds.

Example 1: In September 2022, you buy a treasury note on the secondary market that pays interest in April and October. You receive your first interest payment from this note in October 2022.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2022* federal tax return (due April 2023).

Example 2: In September 2022, you buy a treasury note on the secondary market that pays interest in February and August. Therefore, you don't receive your first interest payment from this note until February *2023*.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2023* federal tax return (due April *2024*).

(For more information on this tax year complication see previous Boglehead's thread: Reporting Accrued Bond Interest Paid

My recommendation:
  • Pull, from your brokerage website, the brokerage confirmation for each treasury note/bond that you bought on the secondary market
  • Circle the line item showing the accrued interest paid to seller
  • Look at the description of the bond (look for what month it was *originally* issued) and write a note on when (month/year) *you* will first receive interest from this treasury
  • Write a note to yourself reminding yourself what needs to be done with the accrued interest paid to seller
  • Stick the whole thing in your tax folder for the *appropriate tax year* as a memory jog.
This is AMAZINGLY helpful and I am going to copy it over to my tax file immediately.

Am glad to hear that this is relatively easy in TT as that is the program I use.

I cannot thank you enough for this detailed explanation. I hope somewhere someone is as helpful to you.
cas
Posts: 1860
Joined: Wed Apr 26, 2017 8:41 am

Re: Taxation of Treasury bills, notes and bonds

Post by cas »

Kevin M wrote: Thu Nov 17, 2022 5:02 pm
moneyflowin wrote: Thu Nov 17, 2022 4:46 pm
For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
Right, but I'm not going to let the tax tail wag the portfolio construction dog.

[. . .]

If all you do is buy at auction and hold to maturity, you probably aren't very interested in this thread.
A gentle request to anyone who *is* reading this thread and is also reading other threads, elsewhere on the Boglehead's forum, created by some newbie inquiring about purchasing treasuries or brokered CDs for the first time:

The free tax preparation services available to older and low/moderate income taxpayers apparently can't handle many of the tax items associated with owning secondary treasuries (i.e. they'll tell you they can't do your return). This has already come up at least once on the forum: Question for those who volunteer to do income taxes. My father bought a secondary treasury at Fidelity can your software handle that ok?

For anyone reading this thread who is tempted to tell a newbie on some other thread "Jump on in to buying Treasuries on the secondary market! The water is great!" ... before you do, PLEASE

Ask them whether they are buying in a taxable or tax sheltered account.

If they are buying in taxable account, ask them how they usually do their taxes.

If buying on the secondary market is going to disqualify someone from using their accustomed free Tax Aide (over 50 years old) or VITA (low to moderate income) help, and toss them into using a paid tax preparer instead, I really doubt the financials work out for buying on the secondary market. (And, if someone is used to having VITA or Tax Aide do their taxes, they may very well be a poor candidate for switching over to using DIY tax software.)

For example, here are some bond taxation items already mentioned on this thread that Tax Aide considers "out of scope":
1099-INT Not in scope for:
  • Any adjustment is needed to the amount reported on Federal 1099-INT [e.g. from cas: accrued interest paid to seller]
  • Box 10 Market Discount
  • Box 11,12, 13 Bond Premiums
1099-B Not in scope for:
  • Box 1f [e.g. from cas: accrued market discount]
User avatar
Blues
Posts: 2306
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

Well, I hope FreeTaxUSA is capable of handling these scenarios or I'm going to lament having gone down this route...(and probably change back to TurboTax which I gave up using several years ago). All of my purchases, (bills and notes), have been on the secondary market.

If you hear a bloodcurdling scream in a few months, you'll know where it came from.
Retired 01/2004 @ 51
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HereToLearn wrote: Thu Nov 17, 2022 10:25 pm Kevin---Thank you for starting this thread. I will be following closely as this has been my first year purchasing Treasury bills and notes.

I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?

I am asking because I am trying to project my tax liability for this year before the end of the year.

Many thanks.
Which broker? Fidelity and Vanguard include accrued interest in your transaction history, which you can download. Schwab probably does too, but I haven't been using them this year.

I download my Treasury transactions on the day of purchase at Fidelity, and the next trading day at Vanguard, and import them into a Treasury Trades spreadsheet. I see the accrued interest there.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

cas wrote: Fri Nov 18, 2022 10:38 am The accrued interest paid to seller is NOT on the 1099-INT and will NOT import automatically into your tax software (or be obvious to your paid tax preparer.) You will have to remember to make a manual adjustment in your tax software (or specifically alert your paid tax preparer). <snip>
Right, but it is included in a supplemental section of the composite 1099 for the year the accrued interest is paid, which as you explain, may not be the same year you bought the Treasury, so you do have to remember this for the following tax year in this case.
cas wrote: Fri Nov 18, 2022 10:38 am My recommendation:
  • Pull, from your brokerage website, the brokerage confirmation for each treasury note/bond that you bought on the secondary market
  • Circle the line item showing the accrued interest paid to seller
  • Look at the description of the bond (look for what month it was *originally* issued) and write a note on when (month/year) *you* will first receive interest from this treasury
  • Write a note to yourself reminding yourself what needs to be done with the accrued interest paid to seller
  • Stick the whole thing in your tax folder for the *appropriate tax year* as a memory jog.
I have just used the accrued interest reported in the supplemental section of the 1099, but I did need to remember to review that for any securities that paid accrued interest in the year purchased but for which a coupon was not received until the following year.

Thanks,

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

cas wrote: Fri Nov 18, 2022 11:34 am
Kevin M wrote: Thu Nov 17, 2022 5:02 pm
moneyflowin wrote: Thu Nov 17, 2022 4:46 pm
For all types of bonds (including Treasuries, corporates, CDs, etc), the easiest thing from a tax perspective is to buy only new issues that are non-callable and hold until maturity. If one does that, the tax reporting is straightforward
Right, but I'm not going to let the tax tail wag the portfolio construction dog.

[. . .]

If all you do is buy at auction and hold to maturity, you probably aren't very interested in this thread.
A gentle request to anyone who *is* reading this thread and is also reading other threads, elsewhere on the Boglehead's forum, created by some newbie inquiring about purchasing treasuries or brokered CDs for the first time:

The free tax preparation services available to older and low/moderate income taxpayers apparently can't handle many of the tax items associated with owning secondary treasuries (i.e. they'll tell you they can't do your return). This has already come up at least once on the forum: Question for those who volunteer to do income taxes. My father bought a secondary treasury at Fidelity can your software handle that ok?

For anyone reading this thread who is tempted to tell a newbie on some other thread "Jump on in to buying Treasuries on the secondary market! The water is great!" ... before you do, PLEASE

Ask them whether they are buying in a taxable or tax sheltered account.

If they are buying in taxable account, ask them how they usually do their taxes.

If buying on the secondary market is going to disqualify someone from using their accustomed free Tax Aide (over 50 years old) or VITA (low to moderate income) help, and toss them into using a paid tax preparer instead, I really doubt the financials work out for buying on the secondary market. (And, if someone is used to having VITA or Tax Aide do their taxes, they may very well be a poor candidate for switching over to using DIY tax software.)

For example, here are some bond taxation items already mentioned on this thread that Tax Aide considers "out of scope":
1099-INT Not in scope for:
  • Any adjustment is needed to the amount reported on Federal 1099-INT [e.g. from cas: accrued interest paid to seller]
  • Box 10 Market Discount
  • Box 11,12, 13 Bond Premiums
1099-B Not in scope for:
  • Box 1f [e.g. from cas: accrued market discount]
Thanks for sharing this. I had not thought about it, since I do my own tax returns. I might add this and other useful inputs to the OP at some point, so most key facts are included there.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Fri Nov 18, 2022 1:56 pm
HereToLearn wrote: Thu Nov 17, 2022 10:25 pm Kevin---Thank you for starting this thread. I will be following closely as this has been my first year purchasing Treasury bills and notes.

I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?

I am asking because I am trying to project my tax liability for this year before the end of the year.

Many thanks.
Which broker? Fidelity and Vanguard include accrued interest in your transaction history, which you can download. Schwab probably does too, but I haven't been using them this year.

I download my Treasury transactions on the day of purchase at Fidelity, and the next trading day at Vanguard, and import them into a Treasury Trades spreadsheet. I see the accrued interest there.

Kevin
Thanks!

It is at Fidelity. Editing AGAIN to say that I found the confirmation statements, so I guess my only remaining question is about the Treasury Trades spreadsheet.

Is a Treasury Trades spreadsheet something you created for yourself or is that a Fidelity tool?

I can easily subtract the amount of interest at purchase from the interest that posted to the account on Nov 15th, and maintain my own spreadsheet but I sense there is a more automated approach.

As always, thank you for your help in educating the uninformed!
User avatar
Groundhog
Posts: 251
Joined: Mon Oct 24, 2011 7:10 pm

Re: Taxation of Treasury bills, notes and bonds

Post by Groundhog »

Blues wrote: Fri Nov 18, 2022 11:51 am Well, I hope FreeTaxUSA is capable of handling these scenarios or I'm going to lament having gone down this route...(and probably change back to TurboTax which I gave up using several years ago). All of my purchases, (bills and notes), have been on the secondary market.

If you hear a bloodcurdling scream in a few months, you'll know where it came from.
I use FreeTaxUSA also (2022 is open now). I just logged into my account and went to the 1099-INT input screen and there is a box to enter Accrued Interest. I don’t know how it flows from there but it appears to be handled by FreeTaxUSA.

I dipped into the Treasury market this year myself. Most have been auctions but several were on the secondary market.
User avatar
Blues
Posts: 2306
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

Groundhog wrote: Fri Nov 18, 2022 3:35 pm
Blues wrote: Fri Nov 18, 2022 11:51 am Well, I hope FreeTaxUSA is capable of handling these scenarios or I'm going to lament having gone down this route...(and probably change back to TurboTax which I gave up using several years ago). All of my purchases, (bills and notes), have been on the secondary market.

If you hear a bloodcurdling scream in a few months, you'll know where it came from.
I use FreeTaxUSA also (2022 is open now). I just logged into my account and went to the 1099-INT input screen and there is a box to enter Accrued Interest. I don’t know how it flows from there but it appears to be handled by FreeTaxUSA.

I dipped into the Treasury market this year myself. Most have been auctions but several were on the secondary market.
Thanks, my friend. I logged in several days ago when they announced the new tax year, and brought my data over from last year's filing...but stopped at the screen for entering 1099 info.

They do say on their site that they can handle all levels of federal returns from simple to complex...but this is my first rodeo with individual bonds vs. funds or TSP.

We'll see what additional adventures await with reporting accrued market discount with FreeTaxUSA.

I appreciate your having checked and sharing the info. :sharebeer
Retired 01/2004 @ 51
sycamore
Posts: 5019
Joined: Tue May 08, 2018 12:06 pm

Re: Taxation of Treasury bills, notes and bonds

Post by sycamore »

cas wrote: Fri Nov 18, 2022 11:34 am ...If buying on the secondary market is going to disqualify someone from using their accustomed free Tax Aide (over 50 years old) or VITA (low to moderate income) help, and toss them into using a paid tax preparer instead, I really doubt the financials work out for buying on the secondary market. (And, if someone is used to having VITA or Tax Aide do their taxes, they may very well be a poor candidate for switching over to using DIY tax software.)

For example, here are some bond taxation items already mentioned on this thread that Tax Aide considers "out of scope":
1099-INT Not in scope for:
  • Any adjustment is needed to the amount reported on Federal 1099-INT [e.g. from cas: accrued interest paid to seller]
  • Box 10 Market Discount
  • Box 11,12, 13 Bond Premiums
1099-B Not in scope for:
  • Box 1f [e.g. from cas: accrued market discount]
FWIW, from the TY2022 scope manual here are the latest 1099-INT scope restrictions:
Not in scope for:
• Taxpayer is a nominee
• Any adjustment is needed to the amount reported on F 1099-INT other than boxes 11, 12, or 13 as listed below
• Amounts reported in the box labeled “Specified private activity bond interest” if AMT is generated
• Amount in box 11 (Bond premium) exceeds amount in box 1 (Interest)
• Amount in box 12 (Bond premium on Treas. Obligations) exceeds amount in box 3 (Interest on U. S. Savings Bond and Treas. Obligation)
• Amount in box 13 (Bond premium on tax-exempt bond) exceeds amount in box 8 (Tax-exempt interest)
• Interest on bonds bought or sold between interest dates unless shown on 1099-INT
• FATCA filing requirement
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HereToLearn wrote: Fri Nov 18, 2022 2:37 pm
Kevin M wrote: Fri Nov 18, 2022 1:56 pm
HereToLearn wrote: Thu Nov 17, 2022 10:25 pm Kevin---Thank you for starting this thread. I will be following closely as this has been my first year purchasing Treasury bills and notes.

I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?

I am asking because I am trying to project my tax liability for this year before the end of the year.

Many thanks.
Which broker? Fidelity and Vanguard include accrued interest in your transaction history, which you can download. Schwab probably does too, but I haven't been using them this year.

I download my Treasury transactions on the day of purchase at Fidelity, and the next trading day at Vanguard, and import them into a Treasury Trades spreadsheet. I see the accrued interest there.

Kevin
Thanks!

It is at Fidelity. Editing AGAIN to say that I found the confirmation statements, so I guess my only remaining question is about the Treasury Trades spreadsheet.

Is a Treasury Trades spreadsheet something you created for yourself or is that a Fidelity tool?

I can easily subtract the amount of interest at purchase from the interest that posted to the account on Nov 15th, and maintain my own spreadsheet but I sense there is a more automated approach.

As always, thank you for your help in educating the uninformed!
I created a Google Sheets spreadsheet to track my Treasury trades. It supports imports from Fidelity and Vanguard transaction downloads--they use different formats, so formulas are required to unify them for tracking and analysis. If just dealing with one broker, it's much easier.
  1. I'm buying Treasuries in multiple accounts at Fidelity, so I first click All accounts, then Activity & Orders. History is selected by default, but if not, select it.
  2. In Time Period enter the time period of interest. I enter today or sometimes today and yesterday to get just the most recent transactions. You would enter a large enough time period to get all of your transactions. I believe the maximum is 90 days, so you may have to do more than one download if your transactions are older than that. If there are non-trade monetary transactions, I change All Transactions to Investment Activity.
  3. I then click the small Download link above the Amount column, and save to a file, using the default filename of Accounts_History.
  4. I then import this to Google sheets into a temp sheet, then copy/paste just the transactions rows of interest into a Fidelity transactions sheet. This will show you accrued interest, price, etc.
  5. I calculate a principal amount value by subtracting accrued interest from Amount, and populate a cell in the Principal amount column with this value.
  6. Price is only downloaded with 3 decimal places, but amount is calculated using many more decimal places, so I calculate the actual price from principal amount, quantity, and inflation factor, which also is included in the download.
  7. There are a number of other columns I populate with results from formulas; e.g., settlement date, maturity date, yield, etc.
  8. In other sheets I consolidate the Fidelity and Vanguard transactions, show just TIPS transactions, show holdings, etc.
This all takes me about five minutes. I still have to do it for the TIPS I bought today.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Groundhog wrote: Fri Nov 18, 2022 3:35 pm
Blues wrote: Fri Nov 18, 2022 11:51 am Well, I hope FreeTaxUSA is capable of handling these scenarios or I'm going to lament having gone down this route...(and probably change back to TurboTax which I gave up using several years ago). All of my purchases, (bills and notes), have been on the secondary market.

If you hear a bloodcurdling scream in a few months, you'll know where it came from.
I use FreeTaxUSA also (2022 is open now). I just logged into my account and went to the 1099-INT input screen and there is a box to enter Accrued Interest. I don’t know how it flows from there but it appears to be handled by FreeTaxUSA.

I dipped into the Treasury market this year myself. Most have been auctions but several were on the secondary market.
Accrued interest and accrued market discount are different things, but you're in good company, because I recently conflated them in discussing how accrued market discount was shown on 1099s.

For bills neither of these is relevant, because there is no accrued interest or accrued market discount with them. These items are only relevant for notes and bonds.

Accrued market discount is not reported on 1099-INT, unless perhaps if you've elected to report income in the year received (I have no experience with that). Unless you make this election, accrued market discount is included in box 1f of 1099-B for the year of disposition, and must be handled as we've discussed.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Fri Nov 18, 2022 4:23 pm
HereToLearn wrote: Fri Nov 18, 2022 2:37 pm
Kevin M wrote: Fri Nov 18, 2022 1:56 pm
HereToLearn wrote: Thu Nov 17, 2022 10:25 pm Kevin---Thank you for starting this thread. I will be following closely as this has been my first year purchasing Treasury bills and notes.

I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?

I am asking because I am trying to project my tax liability for this year before the end of the year.

Many thanks.
Which broker? Fidelity and Vanguard include accrued interest in your transaction history, which you can download. Schwab probably does too, but I haven't been using them this year.

I download my Treasury transactions on the day of purchase at Fidelity, and the next trading day at Vanguard, and import them into a Treasury Trades spreadsheet. I see the accrued interest there.

Kevin
Thanks!

It is at Fidelity. Editing AGAIN to say that I found the confirmation statements, so I guess my only remaining question is about the Treasury Trades spreadsheet.

Is a Treasury Trades spreadsheet something you created for yourself or is that a Fidelity tool?

I can easily subtract the amount of interest at purchase from the interest that posted to the account on Nov 15th, and maintain my own spreadsheet but I sense there is a more automated approach.

As always, thank you for your help in educating the uninformed!
I created a Google Sheets spreadsheet to track my Treasury trades. It supports imports from Fidelity and Vanguard transaction downloads--they use different formats, so formulas are required to unify them for tracking and analysis. If just dealing with one broker, it's much easier.
  1. I'm buying Treasuries in multiple accounts at Fidelity, so I first click All accounts, then Activity & Orders. History is selected by default, but if not, select it.
  2. In Time Period enter the time period of interest. I enter today or sometimes today and yesterday to get just the most recent transactions. You would enter a large enough time period to get all of your transactions. I believe the maximum is 90 days, so you may have to do more than one download if your transactions are older than that. If there are non-trade monetary transactions, I change All Transactions to Investment Activity.
  3. I then click the small Download link above the Amount column, and save to a file, using the default filename of Accounts_History.
  4. I then import this to Google sheets into a temp sheet, then copy/paste just the transactions rows of interest into a Fidelity transactions sheet. This will show you accrued interest, price, etc.
  5. I calculate a principal amount value by subtracting accrued interest from Amount, and populate a cell in the Principal amount column with this value.
  6. Price is only downloaded with 3 decimal places, but amount is calculated using many more decimal places, so I calculate the actual price from principal amount, quantity, and inflation factor, which also is included in the download.
  7. There are a number of other columns I populate with results from formulas; e.g., settlement date, maturity date, yield, etc.
  8. In other sheets I consolidate the Fidelity and Vanguard transactions, show just TIPS transactions, show holdings, etc.
This all takes me about five minutes. I still have to do it for the TIPS I bought today.

Kevin
Again, many thanks.

This seems like a project to hand off to my Tableau/SQL/Excel-savvy children when they are home for Thanksgiving. I will report back after the holidays if I am successful at securing their help.

This thread prompted me to pull down the transaction sheets and enter the info in Excel, but it needs more automation.

Can you explain this: "I calculate a principal amount value by subtracting accrued interest from Amount, and populate a cell in the Principal amount column with this value."

It may be that I am going about this backwards, but I recorded the amount of accrued interest and subtracted that figure from the paid or payable interest to know the amount of interest that I would be taxed on. What is the principal amount used for?

This will start being clearer as more of these Treasuries start to redeem and/or pay interest.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HereToLearn wrote: Fri Nov 18, 2022 5:47 pm This thread prompted me to pull down the transaction sheets and enter the info in Excel, but it needs more automation.

Can you explain this: "I calculate a principal amount value by subtracting accrued interest from Amount, and populate a cell in the Principal amount column with this value."

It may be that I am going about this backwards, but I recorded the amount of accrued interest and subtracted that figure from the paid or payable interest to know the amount of interest that I would be taxed on. What is the principal amount used for?

This will start being clearer as more of these Treasuries start to redeem and/or pay interest.
Not sure what you mean by "recorded", because the accrued interest is in the download file, so should be in the Excel sheet you import it to.

For your purpose, you would subtract the accrued interest from the semi-annual coupon amount to determine the amount of interest you'll owe tax on.

I populate a coupon rate cell with this formula:

Code: Select all

=VALUE(MID($E123,FIND("%",$E123)-7,8))
where cell E123 contains Description.

You can then divide this by half and multiply by the face value of your holding to get the semi-annual coupon payment amount. Then add a column to show semi-annual interest minus accrued interest as the interest you will be taxed on. I'm not currently calculating this, but I might add it to help with income projections for 2022 tax purposes.

I use principal amount to see how much I'm paying excluding the accrued interest, so I can compare these numbers for multiple purchases of the same security. This may be of no interest to you.

I get other things from description, like maturity date with this formula:

Code: Select all

=VALUE(MID($E123,FIND("/",$E123)-2,10))
Kevin
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Fri Nov 18, 2022 6:41 pm
HereToLearn wrote: Fri Nov 18, 2022 5:47 pm This thread prompted me to pull down the transaction sheets and enter the info in Excel, but it needs more automation.

Can you explain this: "I calculate a principal amount value by subtracting accrued interest from Amount, and populate a cell in the Principal amount column with this value."

It may be that I am going about this backwards, but I recorded the amount of accrued interest and subtracted that figure from the paid or payable interest to know the amount of interest that I would be taxed on. What is the principal amount used for?

This will start being clearer as more of these Treasuries start to redeem and/or pay interest.
Not sure what you mean by "recorded", because the accrued interest is in the download file, so should be in the Excel sheet you import it to.

For your purpose, you would subtract the accrued interest from the semi-annual coupon amount to determine the amount of interest you'll owe tax on.

I populate a coupon rate cell with this formula:

Code: Select all

=VALUE(MID($E123,FIND("%",$E123)-7,8))
where cell E123 contains Description.

You can then divide this by half and multiply by the face value of your holding to get the semi-annual coupon payment amount. Then add a column to show semi-annual interest minus accrued interest as the interest you will be taxed on. I'm not currently calculating this, but I might add it to help with income projections for 2022 tax purposes.

I use principal amount to see how much I'm paying excluding the accrued interest, so I can compare these numbers for multiple purchases of the same security. This may be of no interest to you.

I get other things from description, like maturity date with this formula:

Code: Select all

=VALUE(MID($E123,FIND("/",$E123)-2,10))
Kevin
Thank you for all of this.

I have been calculating all of this manually. I had not realized that I could download transactions so I had downloaded holdings and copied the relevant info from the transaction confirmations. My way required me looking up info in one place and recording it in my spreadsheet. Your way is MUCH easier.

This is exactly what I have been doing, with columns for 2022 & 2023: "You can then divide this by half and multiply by the face value of your holding to get the semi-annual coupon payment amount. Then add a column to show semi-annual interest minus accrued interest as the interest you will be taxed on. I'm not currently calculating this, but I might add it to help with income projections for 2022 tax purposes."

I agree that for now I am not ready to need your principal calculation, but the maturity date formula would save me from manually cutting and pasting.

One more question. If I pay $48,000 for a Treasury with a 3% coupon, is the coupon payment calculated on the $48K purchase price or the $50K redemption price?

My continuing to say thanks seems wholly inadequate but I greatly appreciate your patience with this beginner.
User avatar
Topic Author
Kevin M
Posts: 13973
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HereToLearn wrote: Fri Nov 18, 2022 10:24 pm One more question. If I pay $48,000 for a Treasury with a 3% coupon, is the coupon payment calculated on the $48K purchase price or the $50K redemption price?

My continuing to say thanks seems wholly inadequate but I greatly appreciate your patience with this beginner.
The point of this thread is to help everyone understand the topic, whatever their level of current understanding, so you're welcome!

Interest is calculated on the face value, which is $50K in your example.
If I make a calculation error, #Cruncher probably will let me know.
Kookaburra
Posts: 1678
Joined: Thu Apr 02, 2020 11:14 pm

Re: Taxation of Treasury bills, notes and bonds

Post by Kookaburra »

If one buys a Tbill and sells on the secondary market before maturity, how do they know how much of the price discount left is interest vs capital gain/loss?
HereToLearn
Posts: 1073
Joined: Sat Mar 17, 2018 5:53 pm

Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Fri Nov 18, 2022 11:42 pm
HereToLearn wrote: Fri Nov 18, 2022 10:24 pm One more question. If I pay $48,000 for a Treasury with a 3% coupon, is the coupon payment calculated on the $48K purchase price or the $50K redemption price?

My continuing to say thanks seems wholly inadequate but I greatly appreciate your patience with this beginner.
The point of this thread is to help everyone understand the topic, whatever their level of current understanding, so you're welcome!

Interest is calculated on the face value, which is $50K in your example.
I imagine there are many others who are being helped by the useful info here.

Thanks for the interest calculation response also.
User avatar
Electron
Posts: 2401
Joined: Sat Mar 10, 2007 8:46 pm

Re: Taxation of Treasury bills, notes and bonds

Post by Electron »

Kevin M wrote: Tue Nov 15, 2022 8:26 pm Accrued market discount is reported by the broker as an adjustment to capital gains in box 1f of 1099-B for the year in which the security is disposed of (sold or matures). This accrued market discount is entered as interest by the tax preparer on Schedule B. There is some debate as to whether accrued market discount is exempt from state and local income tax. It may vary by state.
If the state tax exemption on accrued market discount is an issue in some states, I assume one could buy Treasuries selling at a premium instead.

The coupon interest would generally be higher but the premium or amortized premium would be subtracted on Schedule B.

I'm surprised that the state tax exemption is an issue as one can often buy a Treasury at a discount or premium with similar yield-to-maturity.
Enjoying the Outdoors
User avatar
Artsdoctor
Posts: 4841
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

HueyLD wrote: Thu Nov 17, 2022 7:02 am With so many first timers investing in individual treasuries, I expect a tsunami of related tax questions between 2/1 and 4/15/2023.

It may be a good idea for them to start studying IRS Pub 550 and Pub 1212 a few months ahead of time. Good luck.
!!!

Couldn't agree more. If you're buying treasuries for the first time this year in a taxable account, the best course would be to buy your treasuries at auction. The second best would be to buy on the secondary market. But I wouldn't sell anything before maturity unless you really understand the tax consequences.
Post Reply