8

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.

1
  • 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, 2022 at 17:00

4 Answers 4

11

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.

6
  • 2
    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, 2022 at 17:21
  • 2
    @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, 2022 at 17:28
  • 1
    Thank you for your help :)
    – Kyle
    Sep 9, 2022 at 17:29
  • 2
    "...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, 2022 at 17:29
  • 1
    @Kyle+ OID reporting (as in Bacon's example) only applies to instruments with duration over a year, which T-bills aren't. However, there is a specific provision in pub550 ch1 "Discount on short-term obligations" unless you choose to include (all) "discount and interest payable" in income "you must treat any gain when you sell ... as ordinary income up to the ratable share of the discount" and refers to ch4 "Discounted debt instruments" which details the discount as acquisition discount (market + OID) for short governments or OID for short non-governments. Jan 4, 2023 at 7:21
1

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.

0

@[Murray J Ellis]

My Schwab 1099 Composite and Year-End Summary - 2023 shows T-Bill interest for the matured T-Bills in the Interest Income __ 2023 Form 1099-INT section, Line 3. The 1099 does not show anything about the T-Bills sold prior to maturity in the 1099 information provided to the IRS.

It shows information about the T-Bills sold prior to maturity in the section labeled YEAR-END SUMMARY INFORMATION IS NOT PROVIDED TO THE IRS, Short-Term Realized Gain or (Loss) It shows all of the net gain as Realized Gain.

By my understanding of IRS Publication 550, the interest portion of the gain is interest earned from date of purchase to date of sale. Any difference between the interest earned and the total Realized Gain is short-term gain or loss.

One way to determine the amount of interest is by ratable share. For example, if the acquisition discount when the T-bill was issued was $2 per $100 and I held the bill for 50% of the days from dare of issue to date of maturity, my ratable share of the acquisition discount is $1 per $100, reportable as interest in Box 3 of the 1099 INT. Any difference between my ratable share of the acquisition discount and the gain shown on the Schwab document is short-term gain or loss.

New contributor
Paul user78602 is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.
-1

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.

1
  • 2
    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? Jan 4, 2023 at 7:22

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .