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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. Sep 9 at 17:00

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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 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. Sep 9 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)." Sep 9 at 17:28
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    Thank you for your help :)
    – Kyle
    Sep 9 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]. Sep 9 at 17:29

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