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:
IRS Form 1099 tells the IRS about interest and gains that may be subject to federal tax.
- 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
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.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)
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:
One can make an election to report accrued market discount annually instead of at maturity. See IRS Pub 550 for details. From the Pub: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.
Bond premium can be amortized or reported in the year of disposition. From Pub 550: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.
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.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.
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:
EDIT: Here is a link to a reply in which I verify the OID reported by Vanguard for TIPS, and share how it was handled by H&R Block tax software for 2022: Verification of OID reported by Vanguard for TIPS.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.
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.