Do you pay capital gains on Treasury bonds?
If you buy a bond when it is issued and hold it until maturity, you generally won't have a capital gain or loss. However, if you sell the bond before its maturity date for more than you paid for it, you'll typically have a capital gain. If you sell it for less than you paid for it, you'll usually have a capital loss.
Whether this income is taxable will depend on the issuer. Interest from corporate bonds is generally taxable at both the federal and state levels. Interest from Treasuries is generally taxable at the federal level, but not at the state level.
Interest on I bonds is exempt from state and local taxes but taxed at the federal level at ordinary income-tax rates.
Interest income is not the only way a fixed income investment can generate returns, however. The market price of a bond can change over time. If a bond matures at a price that is different from the purchase price, you realize a gain or loss that may be treated as a capital gain or capital loss for tax purposes.
Capital gains yield is calculated the same way for a bond as it is for a stock: the increase in the price of the bond divided by the original price of the bond. For instance, if a bond is purchased for $100 (or par) and later rises to $120, the capital gains yield on the bond is 20%.
- Report interest each year and pay taxes on it annually.
- Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
For bonds with very small discounts: If the discount is less than 0.25% of the bond's face value times the number of years to maturity, the discount is taxed as a capital gain in the year the bond matures.
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
Municipal Bonds
Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.
Legacy Treasury Direct: Getting your IRS Form 1099
If you still have securities in Legacy Treasury Direct, we mail you a 1099 at the beginning of each year. If you need a duplicate 1099-INT form for the current tax year, call 844-284-2676 (free call) or, from outside the United States, +1-304-480-6464.
Should I invest in bonds or T bills?
Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes.
We sell Treasury Bonds for a term of either 20 or 30 years. Bonds pay a fixed rate of interest every six months until they mature. You can hold a bond until it matures or sell it before it matures.
Yes, you are required to pay federal income taxes on the interest earned by inherited series I savings bonds. The interest is taxed in the year it is earned and must be reported on the beneficiary's tax return.
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest. Only taxable accounts are allowed to invest in I bonds (i.e., no IRAs or 401(k) plans).
The principal difference between municipal bonds and Treasury bonds, aside from the credit considerations, is that municipal bonds are tax-exempt, that is interest is exempt from federal income taxation.
They are still taxable. The interest income of the savings bond will be taxed to the bond's owner—i.e., the recipient of the gift—when the bond matures and is redeemed for cash (or the owner will be taxed each year if they elect to report the interest income annually).
When a Treasury bond matures – meaning it has reached its maturity date and expires – the investor is paid out the full face value of the bond. So if the bondholder holds a Treasury bond worth $10,000, he or she will receive the $10,000 principal back, as well as earning interest on the investment.
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
Treasury bonds, notes, and bills have no default risk since the U.S. government guarantees them. Investors will receive the bond's face value if they hold it to maturity.
What happens when a treasury bill is reinvested?
Bills can be scheduled for reinvestment for up to two years; other eligible Treasury marketable securities can be scheduled to reinvest one time. When your bill matures, the proceeds will be reinvested or used to purchase the next available security of the same type and term as the original purchase.
Whether 10-year Treasurys are a good investment for you depends on your investment goal. If your goal is to let your money grow slowly and conservatively over time, Treasury notes are considered a low-risk investment if held to maturity since they're backed by the U.S. government.
Each month, the T-bill ETF distributes taxable income to its shareholders, reflecting interest harvested from the short-term Treasuries it owns. Those earnings are taxable at the ordinary income tax rate that applies to salary, as much as 37%.
Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes. Government bonds such as Series HH bonds and Treasury Inflation-Protected Securities (TIPS) may also be tax-exempt. Interest earned on 529 plans is usually exempt from federal taxes.
Short-term capital gains taxes range from 0% to 37%. Long-term capital gains taxes run from 0% to 20%. High income earners may be subject to an additional 3.8% tax called the net investment income tax on both short-and-long term capital gains.
