Taxation of Treasury bills, notes and bonds

[Kevin M]

I have only purchased treasuries on the secondary market and only tbills with maturity dates in the same calendar.

If I get some long dated treasuries, possibly multi-year, how is the tax applied to that?

Does it matter if it is on the secondary market versus new issue? Does it matter if there is a coupon involved?

Not exactly sure how to buy these for long duration to minimize taxable impact, if it even all possible.

Interest is paid out annually-- would that mean that I am forced to pay taxes on the interest annually, as well? Could I defer it until the final maturity date?

Start by reading the OP of this thread. Anything with maturity > 1 year is a note or bond, so that's the section that's relevant. From the OP:

<snip>

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.

So interest is paid semi-annually, not annually, and all such payments are included in your 1099-INT. You pay income tax on anything reported on 1099-INT, so no, you cannot defer taxes on these interest payments.

Continuing with the OP:

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.

So, unless you elect to pay tax on accrued market discount annually, you'll pay it in the year the note/bond is disposed of (matures or is sold).

If you want to defer as much tax as possible, but a Treasury with a very low coupon. This minimizes the coupon interest you receive semi-annually, and the price will be well below 100, meaning that most of your return will be in the form of accrued market discount, on which you can pay tax at maturity.

Example. CUSIP 912828ZE3 is a Treasury maturing 3/31/2027, with a coupon of 0.625%. The yield (to maturity) is 4.642%, so about 4% of that will be returned as accrued market discount at maturity, and only 0.625% would be taxed annually (unless you elect to pay tax on accrued market discount annually, which would defeat the purpose). The price is 87.05743; it's the difference between 100 and this value that you earn as accrued market discount per $100 of bond value. So for one bond, you pay 870.57, and get back 1,000 at maturity. You also pay 2.94 in accrued interest to the seller, but you get that back with your first coupon payment of $6.25 $3.125 per bond.

Kevin

[kalarama]

I have only purchased treasuries on the secondary market and only tbills with maturity dates in the same calendar.

If I get some long dated treasuries, possibly multi-year, how is the tax applied to that?

Does it matter if it is on the secondary market versus new issue? Does it matter if there is a coupon involved?

Not exactly sure how to buy these for long duration to minimize taxable impact, if it even all possible.

Interest is paid out annually-- would that mean that I am forced to pay taxes on the interest annually, as well? Could I defer it until the final maturity date?

Start by reading the OP of this thread. Anything with maturity > 1 year is a note or bond, so that's the section that's relevant. From the OP:

<snip>

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.

So interest is paid semi-annually, not annually, and all such payments are included in your 1099-INT. You pay income tax on anything reported on 1099-INT, so no, you cannot defer taxes on these interest payments.

Continuing with the OP:

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.

So, unless you elect to pay tax on accrued market discount annually, you'll pay it in the year the note/bond is disposed of (matures or is sold).

If you want to defer as much tax as possible, but a Treasury with a very low coupon. This minimizes the coupon interest you receive semi-annually, and the price will be well below 100, meaning that most of your return will be in the form of accrued market discount, on which you can pay tax at maturity.

Example. CUSIP 912828ZE3 is a Treasury maturing 3/31/2027, with a coupon of 0.625%. The yield (to maturity) is 4.642%, so about 4% of that will be returned as accrued market discount at maturity, and only 0.625% would be taxed annually (unless you elect to pay tax on accrued market discount annually, which would defeat the purpose). The price is 87.05743; it's the difference between 100 and this value that you earn as accrued market discount per $100 of bond value. So for one bond, you pay 870.57, and get back 1,000 at maturity. You also pay 2.94 in accrued interest to the seller, but you get that back with your first coupon payment of $6.25 per bond.

Kevin

Kevin - this is a helpful summary for deferring taxes on notes/bonds. My understanding (& hope) is that is the default reporting behavior for Fidelity, which I guess I'll find out on 2023 1099 for my notes maturing beyond 2023.

In addition, I assume you can't do the same thing to defer taxes by buying long term STRIPS (zeros with no coupon). In that case, my understanding is that you would accrue and pay taxes annually (reported as OID). Is that accurate?

[Artsdoctor]

^ If you're buying STRIPS in a taxable account, you'll be paying tax on interest you're not receiving. IRS Publication 550 does a nice job addressing taxation of STRIPS but it may leave you feeling a little overwhelmed.

Kevin's explanation above was very clear but you'll want to make sure that your state treats your discount income in a tax-exempt manner. Buried in the thread above, it's apparent that some states may not (I believe North Carolina was a good example above). It seems counter-intuitive that a state would tax a discount but it's worth verifying wherever you live.

[Drew31]

Kevin - this is a helpful summary for deferring taxes on notes/bonds. My understanding (& hope) is that is the default reporting behavior for Fidelity, which I guess I'll find out on 2023 1099 for my notes maturing beyond 2023.

In addition, I assume you can't do the same thing to defer taxes by buying long term STRIPS (zeros with no coupon). In that case, my understanding is that you would accrue and pay taxes annually (reported as OID). Is that accurate?

I bought some Notes on the secondary market in 2022 maturing this year in 2023 at Fidelity. I did not have anything to report for them in 2022 beyond the coupon interest and did not make any selection - so my assumption is that is default behavior for Fidelity.

When they matured this year, the full difference between cost basis and maturity is showing as accrued market discount.

Hopefully that helps.

[#Cruncher]

If you want to defer as much tax as possible, [buy] a Treasury with a very low coupon. ... Example. CUSIP 912828ZE3 is a Treasury maturing 3/31/2027, with a coupon of 0.625%. The yield (to maturity) is 4.642%, so about 4% of that will be returned as accrued market discount at maturity, and only 0.625% would be taxed annually ... The price is 87.05743; it's the difference between 100 and this value that you earn as accrued market discount per $100 of bond value. So for one bond, you pay 870.57, and get back 1,000 at maturity. You also pay 2.94 in accrued interest to the seller, but you get that back with your first coupon payment of [$6.25 $3.125] per bond.

Yes, this is a good way to defer taxable income. [*] Cell B22 in the bottom row below shows that for this example, over 87% of the taxable income is deferred to the maturity year. This is comprised of the market discount and the final coupon payment. In column C I've added a 0-3/8% Treasury where over 93% of the income is deferred to the final year. (The 85+7/32 price is from today's WSJ Treasuries Quotes.)

Code: Select all

Row                 Col A       Col B       Col C   Formula in Column B
  2            Face value       1,000       1,000
  3            Settlement   9/19/2023   9/19/2023
  4                Mature   3/31/2027   7/31/2027
  5                Coupon      0.625%      0.375%
  6                 Price    87.05743    85.21875
  7     Yield to maturity      4.642%      4.593%  =YIELD(B3,B4,B5,B6,100,2,1)
  8  Previous coupon date   3/31/2023   7/31/2023  =IF(DAY(B4+1)=1,COUPPCD(B3+1,B4+1,2,1)-1,COUPPCD(B3,B4,2,1))
  9      Next coupon date   9/30/2023   1/31/2024  =IF(DAY(B4+1)=1,COUPNCD(B3+1,B4+1,2,1)-1,COUPNCD(B3,B4,2,1))
 10        Days in period         183         184  =B9-B8
 11    Days before settle         172          50  =B3-B8

Code: Select all

 12    Number coupon pmts           8           8  =(YEAR(B4)-YEAR(B8))*2+(MONTH(B4)-MONTH(B8))/6
 13    Half year interest       3.125       1.875  =B2*(B5/2)
 14      Accrued interest       2.937       0.510  =B13*(B11/B10)
 
 15              Interest      22.063      14.490  =B12*B13-B14
 16              Discount     129.426     147.813  =B2*(1-B6/100)
 17          Total income     151.489     162.303  =B15+B16
 18   Discount % of total       85.4%       91.1%  =B16/B17
 
 19             2023-2026      18.938      10.740  =(B12-IF(MONTH(B4)<=6,1,2))*B13-B14
 20                  2027     132.551     151.563  =IF(MONTH(B4)<=6,1,2)*B13+B16
 21          Total income     151.489     162.303  =B19+B20
 22     2027 pct of total       87.5%       93.4%  =B20/B21

* However, I am surprised that the IRS allows market discount for a coupon bond to go untaxed until the maturity year, no matter how small the coupon as long as it's greater than zero. This contradicts the treatment of a zero-coupon STRIPS where a portion of the discount to par is taxed every year.

[Jaylat]

I'm trying to estimate this year's OID taxable income for a TIPS portfolio held since January 1 (i.e. the increase in the inflation-adjusted principal amount of the bonds that occurred during the year).

If I understand correctly the calculation should be as follows:

(Total Inflation Adjusted Price of TIPS Portfolio as of Jan 1, 23) x ((Current Reference CPI / Reference CPI as of Jan 1, 23)-1)

=OID Taxable Income attributable to inflation adjustments to current date

[I had originally tried to estimate the OID for each TIPS bond, but it seems there's no need to do that. Just add up the total inflation adjusted TIPS portfolio and multiply by the change in reference CPI.]

Update: As a check, I used this same formula on my TIPS portfolio for 2022. The OID taxable income calculated matched the OID on Schwab's 2022 Form 1099 to the penny.

[nalor511]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

[MacktheKnife]

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.

Thanks again for the excellent thread Kevin. I have a basic question. Apologies if it has already been covered.

I buy a 4 week T-bill for $995.xx
I hold it two weeks and sell it on the secondary market.

Did I:
a) just incur $2.xx in interest that is exempt from state taxes.
b) just incur $2.xx in capital gains that is taxable in most states.

Thanks.

[MacktheKnife]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

LOL. It looks like you asked the same question that I did (or at least similar) while I was typing my post. Did this actually happen to you?

[nalor511]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

LOL. It looks like you asked the same question that I did (or at least similar) while I was typing my post. Did this actually happen to you?

Not yet, but with the way Apex Clearing handles 1099's, I fully expect it to.

[Kevin M]

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.

Thanks again for the excellent thread Kevin. I have a basic question. Apologies if it has already been covered.

I buy a 4 week T-bill for $995.xx
I hold it two weeks and sell it on the secondary market.

Did I:
a) just incur $2.xx in interest that is exempt from state taxes.
b) just incur $2.xx in capital gains that is taxable in most states.

Thanks.

Depends how much you sell it for. The accrued acquisition discount is interest, and any difference is short-term cap gain or loss. The interest part would be about $2.50, since you held it for half of the period from acquisition to maturity. I'm assuming you mean you buy it at auction.

The interest part should count as Treasury interest in all states, but I'm not a specialist in state tax laws.

[Artsdoctor]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

When you buy your T-bill, you'll note the purchase amount (let's say $9,900) and then you'll figure out the number of days until maturity when you'll be paid $10,000 (let's say that's 100 days). That means that you should earn $100 over 100 days, or $1 per day. Let's say that you sell your T-bill on Day 90 for $10,000. On Day 90, you will have earned $90 in interest which you'll need to declare that as such; additionally, your short-term capital gain is $10.

[nalor511]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

When you buy your T-bill, you'll note the purchase amount (let's say $9,900) and then you'll figure out the number of days until maturity when you'll be paid $10,000 (let's say that's 100 days). That means that you should earn $100 over 100 days, or $1 per day. Let's say that you sell your T-bill on Day 90 for $10,000. On Day 90, you will have earned $90 in interest which you'll need to declare that as such; additionally, your short-term capital gain is $10.

Ok, so using your example, if your broker issues a 1099B with the entire $100 as STCG, how would you fix the matter in your tax software? Import the original values and then adjust them downard $90on 8949 with a code in column F (perhaps code O), and then mock up a fake 1099-int for $90?

[MacktheKnife]

Thank you both. That helps. I'm on the front end of setting up a brokerage account that will consist entirely of T-bills and a small core Government Money Market account at Fidelity. This is for a person that I am serving as POA. For various reasons (that I don't care to discuss), we are trying to limit earnings to being state tax exempt to the maximum extent possible. With Fidelity, I can get virtually all of the assets in 4 week T-bills on auto-roll. That means that as I need to pull funds on a monthly basis, I can likely just let them roll and sell off what is needed in the secondary market without incurring any meaningful state-taxable income.

Example: account consists of $400K with $100K groupings of 4-week bills, one maturing each week. If I need to carve off $5K of cash to transfer to a checking account, I can just sell $5K from any of the legs in the secondary market without screwing up Fidelity's nifty "never out of the treasuries" auto -roll process. Does that make sense?

[Kevin M]

Thank you both. That helps. I'm on the front end of setting up a brokerage account that will consist entirely of T-bills and a small core Government Money Market account at Fidelity. This is for a person that I am serving as POA. For various reasons (that I don't care to discuss), we are trying to limit earnings to being state tax exempt to the maximum extent possible. With Fidelity, I can get virtually all of the assets in 4 week T-bills on auto-roll. That means that as I need to pull funds on a monthly basis, I can likely just let them roll and sell off what is needed in the secondary market without incurring any meaningful state-taxable income.

Example: account consists of $400K with $100K groupings of 4-week bills, one maturing each week. If I need to carve off $5K of cash to transfer to a checking account, I can just sell $5K from any of the legs in the secondary market without screwing up Fidelity's nifty "never out of the treasuries" auto -roll process. Does that make sense?

I would use proceeds from maturing bills rather than sell on secondary. You'll lose enough to the bid/ask spread that your rate of return is likely to be less than the original yield, but it also depends on how rates move.

You can cancel the auto roll, let the bills mature, and enter a new auction order for fewer bills. If you have enough in the MM fund to cover the new order, you can do it online. Unfortunately Fidelity does not "see" the maturing bills as available for rolling into more Treasuries; Vanguard and Schwab do.

Since you'd be OK selling on secondary, you should be OK buying on secondary, which eliminates the hassles of what you're trying to do with auto roll.

What I do is have a ladder with rungs maturing monthly. On the trading day before maturity, I decide how much of the maturing proceeds I want to reinvest, and I enter an order for a Treasury at the long end of the ladder. I do everything on secondary, since I can buy what I want when I want, and am not subject to auction timing.

[MacktheKnife]

Thank you both. That helps. I'm on the front end of setting up a brokerage account that will consist entirely of T-bills and a small core Government Money Market account at Fidelity. This is for a person that I am serving as POA. For various reasons (that I don't care to discuss), we are trying to limit earnings to being state tax exempt to the maximum extent possible. With Fidelity, I can get virtually all of the assets in 4 week T-bills on auto-roll. That means that as I need to pull funds on a monthly basis, I can likely just let them roll and sell off what is needed in the secondary market without incurring any meaningful state-taxable income.

Example: account consists of $400K with $100K groupings of 4-week bills, one maturing each week. If I need to carve off $5K of cash to transfer to a checking account, I can just sell $5K from any of the legs in the secondary market without screwing up Fidelity's nifty "never out of the treasuries" auto -roll process. Does that make sense?

Thanks for responding Kevein.

I would use proceeds from maturing bills rather than sell on secondary. You'll lose enough to the bid/ask spread that your rate of return is likely to be less than the original yield, but it also depends on how rates move.

The problem with this is that if I have very little in the money market (I plan to, since that generated state tax liability) I won't have assets to return the remainder of the maturing funds to T-Bills until the next week. This would compound the state tax concerns.

You can cancel the auto roll, let the bills mature, and enter a new auction order for fewer bills. If you have enough in the MM fund to cover the new order, you can do it online. Unfortunately Fidelity does not "see" the maturing bills as available for rolling into more Treasuries; Vanguard and Schwab do.

See above.

Since you'd be OK selling on secondary, you should be OK buying on secondary, which eliminates the hassles of what you're trying to do with auto roll.

I would prefer to let them all auto-roll and then just sell off in the secondary market what I need. Why would that be more "hassles" than letting a whole batch mature and then rebuying on the secondary market? If I need 10% of a maturing batch. I pay bid/ask on 10%. If I do it your way, wouldn't I be paying bid/ask on 90%?

What I do is have a ladder with rungs maturing monthly. On the trading day before maturity, I decide how much of the maturing proceeds I want to reinvest, and I enter an order for a Treasury at the long end of the ladder. I do everything on secondary, since I can buy what I want when I want, and am not subject to auction timing.

That's why I want to let auto-roll do its thing to the maximum extent possible. If I had told you that I wasn't planning to keep any meaningful funds in the money market, would you have seen more value in my approach?

[nalor511]

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.

Thanks again for the excellent thread Kevin. I have a basic question. Apologies if it has already been covered.

I buy a 4 week T-bill for $995.xx
I hold it two weeks and sell it on the secondary market.

Did I:
a) just incur $2.xx in interest that is exempt from state taxes.
b) just incur $2.xx in capital gains that is taxable in most states.

Thanks.

Depends how much you sell it for. The accrued acquisition discount is interest, and any difference is short-term cap gain or loss. The interest part would be about $2.50, since you held it for half of the period from acquisition to maturity. I'm assuming you mean you buy it at auction.

The interest part should count as Treasury interest in all states, but I'm not a specialist in state tax laws.

How would you report this on your taxes, if you receive a 1099-b for that $2.xx instead of a 1099-int? Just do an adjustment down of the 1099-b income entry and add a mocked-up 1099-int entry, in your tax software?

[Artsdoctor]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

When you buy your T-bill, you'll note the purchase amount (let's say $9,900) and then you'll figure out the number of days until maturity when you'll be paid $10,000 (let's say that's 100 days). That means that you should earn $100 over 100 days, or $1 per day. Let's say that you sell your T-bill on Day 90 for $10,000. On Day 90, you will have earned $90 in interest which you'll need to declare that as such; additionally, your short-term capital gain is $10.

Ok, so using your example, if your broker issues a 1099B with the entire $100 as STCG, how would you fix the matter in your tax software? Import the original values and then adjust them downard $90on 8949 with a code in column F (perhaps code O), and then mock up a fake 1099-int for $90?

You'll need to read your 1099-B carefully and see what has been reported to the IRS. The most important thing overall is that you match on your return what has been reported to the IRS so you'll decrease the chances of getting letter requesting clarifications of discrepancies. If your 1099-B is showing a short-term gain that should be interest and the transaction has been reported to the IRS, you can use Form 8949 (gains) to enter exactly what has been reported--and then use an adjustment amount for the interest. You'll enter the interest on Schedule B as treasury interest. Form 8949 feeds into Schedule D.

[nalor511]

Question: IF you buy a tbill at 990 and sell it before maturity for 1000 ($10 profit), and you get a 1099-B from your brokerage showing that $10 as STCG, what is the proper way to report this $10 on your taxes?

When you buy your T-bill, you'll note the purchase amount (let's say $9,900) and then you'll figure out the number of days until maturity when you'll be paid $10,000 (let's say that's 100 days). That means that you should earn $100 over 100 days, or $1 per day. Let's say that you sell your T-bill on Day 90 for $10,000. On Day 90, you will have earned $90 in interest which you'll need to declare that as such; additionally, your short-term capital gain is $10.

Ok, so using your example, if your broker issues a 1099B with the entire $100 as STCG, how would you fix the matter in your tax software? Import the original values and then adjust them downard $90on 8949 with a code in column F (perhaps code O), and then mock up a fake 1099-int for $90?

You'll need to read your 1099-B carefully and see what has been reported to the IRS. The most important thing overall is that you match on your return what has been reported to the IRS so you'll decrease the chances of getting letter requesting clarifications of discrepancies. If your 1099-B is showing a short-term gain that should be interest and the transaction has been reported to the IRS, you can use Form 8949 (gains) to enter exactly what has been reported--and then use an adjustment amount for the interest. You'll enter the interest on Schedule B as treasury interest. Form 8949 feeds into Schedule D.

Thank you, but you would use an adjustment on 8949 to take the cap gains downward (negative), and then enter the same amount on Sch B as treasury interest --- can you confirm I am understanding you correctly?

[Kevin M]

Thank you both. That helps. I'm on the front end of setting up a brokerage account that will consist entirely of T-bills and a small core Government Money Market account at Fidelity. This is for a person that I am serving as POA. For various reasons (that I don't care to discuss), we are trying to limit earnings to being state tax exempt to the maximum extent possible. With Fidelity, I can get virtually all of the assets in 4 week T-bills on auto-roll. That means that as I need to pull funds on a monthly basis, I can likely just let them roll and sell off what is needed in the secondary market without incurring any meaningful state-taxable income.

Example: account consists of $400K with $100K groupings of 4-week bills, one maturing each week. If I need to carve off $5K of cash to transfer to a checking account, I can just sell $5K from any of the legs in the secondary market without screwing up Fidelity's nifty "never out of the treasuries" auto -roll process. Does that make sense?

Thanks for responding Kevein.

I would use proceeds from maturing bills rather than sell on secondary. You'll lose enough to the bid/ask spread that your rate of return is likely to be less than the original yield, but it also depends on how rates move.

The problem with this is that if I have very little in the money market (I plan to, since that generated state tax liability) I won't have assets to return the remainder of the maturing funds to T-Bills until the next week. This would compound the state tax concerns.

You can cancel the auto roll, let the bills mature, and enter a new auction order for fewer bills. If you have enough in the MM fund to cover the new order, you can do it online. Unfortunately Fidelity does not "see" the maturing bills as available for rolling into more Treasuries; Vanguard and Schwab do.

See above.

Since you'd be OK selling on secondary, you should be OK buying on secondary, which eliminates the hassles of what you're trying to do with auto roll.

I would prefer to let them all auto-roll and then just sell off in the secondary market what I need. Why would that be more "hassles" than letting a whole batch mature and then rebuying on the secondary market? If I need 10% of a maturing batch. I pay bid/ask on 10%. If I do it your way, wouldn't I be paying bid/ask on 90%?

What I do is have a ladder with rungs maturing monthly. On the trading day before maturity, I decide how much of the maturing proceeds I want to reinvest, and I enter an order for a Treasury at the long end of the ladder. I do everything on secondary, since I can buy what I want when I want, and am not subject to auction timing.

That's why I want to let auto-roll do its thing to the maximum extent possible. If I had told you that I wasn't planning to keep any meaningful funds in the money market, would you have seen more value in my approach?

Move the account to Schwab. There you can buy with funds that settle on or before the settlement date of the maturing Ts. So if you have 20 maturing next week, and you want to cash out 10 for spending, you can place an auction order for 10, and Schwab "sees" that you have 20 maturing on the same settlement date, so will let you place the order.

Or just do it your way.

I don't like auto roll because I can't do a rolling ladder with it, in general. When my Treasuries mature, I buy at the long end of my ladder, and that might be a year or 18 months out. It may meet your needs though.

[MacktheKnife]

Move the account to Schwab. There you can buy with funds that settle on or before the settlement date of the maturing Ts. So if you have 20 maturing next week, and you want to cash out 10 for spending, you can place an auction order for 10, and Schwab "sees" that you have 20 maturing on the same settlement date, so will let you place the order.

That sounds like a good feature. I was not aware that any brokerage could do that. Perhaps Fidelity will upgrade their process at some point. Does Schwab offer auto-roll that works like Fidelity? (i.e. just set it and forget it)

I don't like auto roll because I can't do a rolling ladder with it, in general. When my Treasuries mature, I buy at the long end of my ladder, and that might be a year or 18 months out. It may meet your needs though.

I'm a fan of a rolling ladder for longer term investments. This is not that. It really doesn't matter how the four week T-Bills are staggered, especially if I can just sell what I need in the secondary market at any time without incurring state tax liabilities (other than the occasional very STCG).

Have you looked at the bid/ask spreads on four week T-Bills? I think they are at something like the second decimal point in YTM. Certainly just noise for relatively small amounts of money for a short amount of time.

[Doc]

Does Schwab offer auto-roll that works like Fidelity? (i.e. just set it and forget it)

Schwab introduced an auto-roll feature some 2-4 months ago. I am testing it out with 4 week T-bills. So far there is a one auction delay in buying the new bill.

One of these days I am going to try to get more information.

(We currently have a large 26 week T-Bill ladder with rungs maturing the same time as a 52 week bill, and I want to set up auto-roll but the one week delay would stir the pooch.)

[MacktheKnife]

Does Schwab offer auto-roll that works like Fidelity? (i.e. just set it and forget it)

Schwab introduced an auto-roll feature some 2-4 months ago. I am testing it out with 4 week T-bills. So far there is a one auction delay in buying the new bill.

(We currently have a large 26 week T-Bill ladder with rungs maturing the same time as a 52 week bill, and I want to set up auto-roll but the one week delay would stir the pooch.)

Thanks Doc. That doesn't sound very attractive. I checked Fidelity this morning. I bought a test set of 3 T-bills four weeks ago. The autoroll order went in last Tuesday for another $3000 face value. Since I have plenty of cash in that account for settlement, I sold one of the maturing T-bills in the secondary market. I received $999.85. I would have received $1000 next Tuesday. Needless to say, just dropping everything in auto-roll and selling anything I need for cash in the secondary market as needed doesn't look like it's going to cost me more than couch change. I can't imagine a simpler approach.

[kalarama]

Does Schwab offer auto-roll that works like Fidelity? (i.e. just set it and forget it)

Schwab introduced an auto-roll feature some 2-4 months ago. I am testing it out with 4 week T-bills. So far there is a one auction delay in buying the new bill.

(We currently have a large 26 week T-Bill ladder with rungs maturing the same time as a 52 week bill, and I want to set up auto-roll but the one week delay would stir the pooch.)

Thanks Doc. That doesn't sound very attractive. I checked Fidelity this morning. I bought a test set of 3 T-bills four weeks ago. The autoroll order went in last Tuesday for another $3000 face value. Since I have plenty of cash in that account for settlement, I sold one of the maturing T-bills in the secondary market. I received $999.85. I would have received $1000 next Tuesday. Needless to say, just dropping everything in auto-roll and selling anything I need for cash in the secondary market as needed doesn't look like it's going to cost me more than couch change. I can't imagine a simpler approach.

Selling T-bills early is easy enough but just remember during tax time you'll have to manually compute what portion of the gain is interest vs capital gain/loss for the early sale (whereas holding to maturity results in all gain being counted as interest).

[MacktheKnife]

Selling T-bills early is easy enough but just remember during tax time you'll have to manually compute what portion of the gain is interest vs capital gain/loss for the early sale (whereas holding to maturity results in all gain being counted as interest).

Won't Fidelity do that for me?

[kalarama]

Selling T-bills early is easy enough but just remember during tax time you'll have to manually compute what portion of the gain is interest vs capital gain/loss for the early sale (whereas holding to maturity results in all gain being counted as interest).

Won't Fidelity do that for me?

Not for T-bills AFAIK. And last year Schwab didn't either for me. There is a discussion somewhere in this long thread about how to compute it (it's straight forward but does need to be done per transaction). I have a couple dozen t-bills that I sold this year and put together a spreadsheet to compute accrued interest vs capital gain/loss per transaction.

For notes/bonds however, I believe that brokerages do compute and provide accrued market discount which is used to adjust the capital gain/loss on the 1099.

[Subvisual]

I am curious how Fidelity will report my t-bill sold early in their 1099-consolidated. In most cases capital gains or interest appears instantly or next day on their "Tax Info YTD" tab for my brokerage account. In this case though that early sold t-bill isn't yet being classified as either a short-term capital gain or interest. In fact it doesn't appear anywhere on the "Tax Info YTD".

[MacktheKnife]

I started at the beginning of the thread and have read through about half of it. It's a great thread, but most of you are discussing calculus and I have a basic elementary school math question.

I'm going to re-ask my question more simply and accurately:

I buy two $1000 4 week T-bills, at auction, for $995.00 each.
They each mature 28 days later, at which time the treasury pays me $1000 each.
I would have earned $5 of pure interest for each T-Bill that will not be taxed at the state level.

The above is all obvious.

Since the expected interest payout for each is $5 over 28 days, the daily interest is $5.00/28 = $0.18.
The bills are issued on Tuesday and I sell one in the secondary market on Friday for $995.60 I've gained $0.60. Does this consist of $0.54 of interest and $0.06 of STCG?
I sell the other in the secondary market the next Monday for $996.00. I've gained $1.00. Does this consist of $1.08 of interest and $0.08 of STCL?

Let's forget the nuances of brokerage reporting for now until I make sure that I at least understand these basics correctly.

Moderators: please feel free to "de-merge" this post and responses if you would rather them not muck up the advanced math discussions.

[erp]

I think for tbills, it may not be clearcut. But here's a post showing a 1099 with sales of *tnotes* before maturity. The gain is broken out between accrued market discount and cap gain as you described. But the last sale shows no cap gain - maybe because it would have had a cap loss so the accrued market discount caps it out.

viewtopic.php?p=6955743#p6955743

People have reported here that tbills do *not* get reported the same way on the 1099, so it's reasonable to wonder if the tax treatment should be the same. I think people probably have been either just reporting it all as interest, or manually calculating the breakdown like the broker automatically does for tnotes.

[MacktheKnife]

I think for tbills, it may not be clearcut. But here's a post showing a 1099 with sales of *tnotes* before maturity. The gain is broken out between accrued market discount and cap gain as you described. But the last sale shows no cap gain - maybe because it would have had a cap loss so the accrued market discount caps it out.

viewtopic.php?p=6955743#p6955743

People have reported here that tbills do *not* get reported the same way on the 1099, so it's reasonable to wonder if the tax treatment should be the same. I think people probably have been either just reporting it all as interest, or manually calculating the breakdown like the broker automatically does for tnotes.

Unfortunately (for me), the vast majority of posts in this and other threads are focused on buying a bill/note/bond in the secondary market and holding it to maturity. That is the exact opposite of what I am asking about. I was tempted to start another thread, focused entirely on my scenario, but figured it would just be merged into this one like so many others have.

[MacktheKnife]

I think for tbills, it may not be clearcut. But here's a post showing a 1099 with sales of *tnotes* before maturity.

Thanks, but as I posted I want to make certain that I understand the very basics before getting into how things are reported on 1099s. Hopefully somebody will be able to help me out.

[Artsdoctor]

I started at the beginning of the thread and have read through about half of it. It's a great thread, but most of you are discussing calculus and I have a basic elementary school math question.

I'm going to re-ask my question more simply and accurately:

I buy two $1000 4 week T-bills, at auction, for $995.00 each.
They each mature 28 days later, at which time the treasury pays me $1000 each.
I would have earned $5 of pure interest for each T-Bill that will not be taxed at the state level.

The above is all obvious.

Since the expected interest payout for each is $5 over 28 days, the daily interest is $5.00/28 = $0.18.
The bills are issued on Tuesday and I sell one in the secondary market on Friday for $995.60 I've gained $0.60. Does this consist of $0.54 of interest and $0.06 of STCG?
I sell the other in the secondary market the next Monday for $996.00. I've gained $1.00. Does this consist of $1.08 of interest and $0.08 of STCL?

Let's forget the nuances of brokerage reporting for now until I make sure that I at least understand these basics correctly.

Moderators: please feel free to "de-merge" this post and responses if you would rather them not muck up the advanced math discussions.

That's the problem with these long threads. Yes, your answers have all been answered above, several times.

For your first lot, you bought your T-bills for $995. By your calculations, you will earn $0.18 each day. You sell that lot 3 days later so you've earned $0.54 in interest. Your sales price is $995.60 so you have $0.06 in STCG.

For your second lot, you bought your T-bills for $995. You will earn 18 cents each day. You sell your lot 6 days later so you've earned $1.08 in interest. Your sales price is $996.00. This is where there were several pages of debate above. You would not be wrong to declare $1.08 in interest and then 8 cents as a short-term loss. However, many made a very cogent argument that declaring $1.00 in interest alone would be acceptable and perhaps preferable. Despite 12 pages, we did not have tax lawyer weigh in and until one does, I'll take the second option.

[kalarama]

You may want to peruse these other threads as well:

How does taxation work on tbills when selling them before maturation?
viewtopic.php?t=398517

Selling T-Bills early
viewtopic.php?t=391924

[MacktheKnife]

I started at the beginning of the thread and have read through about half of it. It's a great thread, but most of you are discussing calculus and I have a basic elementary school math question.

I'm going to re-ask my question more simply and accurately:

I buy two $1000 4 week T-bills, at auction, for $995.00 each.
They each mature 28 days later, at which time the treasury pays me $1000 each.
I would have earned $5 of pure interest for each T-Bill that will not be taxed at the state level.

The above is all obvious.

Since the expected interest payout for each is $5 over 28 days, the daily interest is $5.00/28 = $0.18.
The bills are issued on Tuesday and I sell one in the secondary market on Friday for $995.60 I've gained $0.60. Does this consist of $0.54 of interest and $0.06 of STCG?
I sell the other in the secondary market the next Monday for $996.00. I've gained $1.00. Does this consist of $1.08 of interest and $0.08 of STCL?

Let's forget the nuances of brokerage reporting for now until I make sure that I at least understand these basics correctly.

Moderators: please feel free to "de-merge" this post and responses if you would rather them not muck up the advanced math discussions.

That's the problem with these long threads.

Thanks for responding.

Yes, your answers have all been answered above, several times.

I'm not sure that my specific questions have been answered. A lot about 1099R reporting and tax returns, but as I stated I really just wanted the most basic understanding of how any gains and losses are classified at the most rudimentary level.

This is where there were several pages of debate above. You would not be wrong to declare $1.08 in interest and then 8 cents as a short-term loss. However, many made a very cogent argument that declaring $1.00 in interest alone would be acceptable and perhaps preferable. Despite 12 pages, we did not have tax lawyer weigh in and until one does, I'll take the second option.

Yep. I labored through the debate and there is a lot of great information for many situations. Fortunately, they don't parallel my situation. I only need to keep total income below a certain state's exemption amount for a senior citizen. If I can do that, I won't have to file that state return and it won't matter after that. If the vast majority of income is from 4 week T-bills bought at auction and held to maturity (and then autorolled indefinitely - as I described in a previous post), then this other noise from occasional sales in the secondary market won't add up to anything meaningful and not only will no taxes be owed, but no tax return will need to be filed. That's why I don't really care about some of the other aspects of this discussion.