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I've been buying 6-month treasury bills. The interest is taxed at maturity as interest income. If however it could be taxed as short-term capital gains, I could avoid paying any taxes on it because I have substantial capital losses from tax loss harvesting.

When buying a t-bill, it's purchased at a discount to par value, and at the maturity date you get the full par value. The closer the maturity date gets, the more you can sell the t-bill for.

Can I simply sell the treasury bills a few days before maturity to essentially convert the interest income into short-term capital gains?

I know t-bonds have "accrued interest" when you sell which would be taxed as interest income, but does this apply to t-bills as well? From my searching, it doesn't seem like it would, but I'm not completely sure.

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  • T-bonds and t-bills are basically the same, from the IRS' perspective, and the treatment would mirror any corporate bond or other similar item.
    – Grade 'Eh' Bacon
    Sep 9, 2022 at 17:00

3 Answers 3

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This here's the relevant guidance from IRS:

https://www.irs.gov/instructions/i1040sb

Basically no, the accrued portion of unpaid interest is still considered regular interest income; see further here [no relation]: https://www.taxact.com/support/1191/2017/form-1099-int-accrued-interest

This avoids a patently obvious method of tax avoidance that clearly goes against the economic reality of what is happening.

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  • Thank you. The one from the guidance that seems like it could apply is OID, since t-bills are issued at a discount to par. I'm not sure that the "Accrued interest" of the applies because I don't believe a buyer of a T-Bill pays the seller accrued interest. The t-bill (as opposed to a t-note or t-bond) doesn't have any interest coupon payments.
    – Kyle
    Sep 9, 2022 at 17:17
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    Accrued interest from coupon payments is basically the same concept as the final payout at maturity; difference in terms is based on convention of the instruments not economic substance that matters for tax.
    – Grade 'Eh' Bacon
    Sep 9, 2022 at 17:21
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    @Kyle Great, always best to have IRS guidance with direct reference to your situation: "Example 4. Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235.00 on November 1 of Year 1. The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. The debt instrument provides for semiannual payments of interest at 10% (0.10). Assume the debt instrument is a capital asset in Larry's hands. The debt instrument has $13,765.00 of OID ($100,000 stated redemption price at maturity minus $86,235.00 issue price)."
    – Grade 'Eh' Bacon
    Sep 9, 2022 at 17:28
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    Thank you for your help :)
    – Kyle
    Sep 9, 2022 at 17:29
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    "...Larry sold the debt instrument for $90,000 on November 1 of Year 4. Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556.00 of OID in income and has increased his basis by that amount to $90,791.00. Larry has realized a loss of $791.00. All of Larry's loss is capital loss. " - from page 6; basically the interest portion itself is income you recognize which then gets added to your basis when determining further gain / loss [which reflects the change due to market interest rates impacting value of the security, not interest].
    – Grade 'Eh' Bacon
    Sep 9, 2022 at 17:29
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T-bills: If you don't sell it is interest income. If you sell before, then it is a capital gain or loss. I have done this and that is how it will show up on your monthly broker statements.

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    Monthly statements don't always get the tax character of transactions correct; what did your 1099's say? And did you see the provisions in pub 550 I noted in a comment on the other answer?
    – dave_thompson_085
    Jan 4 at 7:22
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Great question - my two cents: Turning T-Bill interest into Capital Gain is useless for most of us since it will be short term and taxed at ordinary tax rate. Also, if your interest is State tax exempt and you change it to short term capital gain, it will now be State taxable. But, having losses to write it off against and owe no tax on the T-Bill interest seems too good to be true, however the broker statement will probably show it as short term gain. I think there are flaws in broker statements when it comes to things like this especially for bonds. Update: I just got my 1099 from schwab and it shows several t-bills I sold as short term gain. They should have shown it as treasury interest but their explanation is 'That's just how schwab does it'. Now I have to pay Ca state tax on the gain.

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