Assume we have some fund (like a money market fund) with x% of the capital in treasury bills. Treasury bills are not state or local taxed.

If I invest some capital into this fund, is my entire portion of earnings state/local taxed? Or does the portion of the earnings that come from the treasury bills get exempt from state/local tax? Source would be appreciated. Thanks

  • "Or does the portion of the earnings that come from the treasury bills get exempt from state/local tax?" That would be the logical presumption.
    – RonJohn
    Jul 21, 2023 at 2:31
  • 1
    A country/state tag would be useful for tax questions.
    – 0xFEE1DEAD
    Jul 21, 2023 at 3:41
  • I've added a US tag based on the context.
    – Vicky
    Jul 21, 2023 at 14:48

2 Answers 2


I'm assuming this is a question about US taxation, from the context.

You'll need to check how your State handles this situation, it may differ from State to State. Here's a quote from the California FTB guidance (direct link to the PDF, see page 5):

California does not tax dividends paid by a fund attributable to interest received from U.S. obligations or California state or municipal obligations IF at least 50% of the fund’s assets would be exempt from California tax when held by an individual. California taxes dividends derived from mutual funds that are paid from interest received from obligations (bonds) issued by non-California states or municipalities in other states. The fund will provide a statement regarding the dividends it pays.

So, if you're a California taxpayer, if your x is <50% you'll pay the CA state income tax even if you'd be exempt had you held the T-Bills directly and not through the fund.

  • I believe New York and Connecticut have similar requirements; other states do not.
    – Craig W
    Jul 21, 2023 at 17:34

Both the U.S. constitution ("Supremacy Clause") and U.S. federal law (specifically, 31 U.S.C. §3124(a)) exempt from state taxation interest on "obligations of the United States Government." Be aware, however, that under a 1994 Supreme Court ruling (Nebraska Dept. of Revenue v. Loewenstein, 513 U.S. 123), income earned from "repos" of U.S. government securities (a common type transaction engaged in by funds holding U.S. gov't bonds) is not exempted from taxation by states.

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