Treasury Bill Interest vs Return

I'm a little confused about what is taxable interest and when tax is due for Treasury Bills.

To illustrate, say I buy a 6 mo bill for $10,000 from Treasury Direct. On Issue Date, Treasury Direct refunds $100 to my bank account. Since Treasury Direct labels it "refund" I assume that is not interest, and I purchased the Bill for $9,900. Am I right or wrong?

On maturity, I get the full 10,000 back to my bank account. I assume that the $9,900 is my principal, and $100 is my interest. Am I right or wrong?

If I'm right, the $100 is taxable interest, but when is it taxable? At time of payment? Or is it accrued since time of purchase?

I hope my question is clear enough.

Thanks

Reply to
Harry Thompson
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As you are dealing with a maturity date of one year or less, you do not have any OID. Your cost basis is what you paid for the bill ($9900). Upon maturity you would have a $100 capital gain. Your interest income is paid to you separately every six months.

Reply to
Alan

Unfortunately, Alan is completely wrong in his explanation of the taxation of T-Bills (and how they pay interest, for that matter).

To the original poster -- you're generally on the right track. The refund is NOT interest and is not reported anywhere at all. Your original basis is indeed $9900. When the T-Bill matures and you get your $10,000, the $100 is interest, NOT a capital gain, and is taxed in the year in which the T-Bill matures.

Furthermore, if a T-Bill is sold before maturity, any gain is considered to be and is reported as interest, with basis being your original basis plus the amount interest recognized on the sale (in other words, you'll always have zero capital gain or less when selling a T-Bill). I don't recall if this is a special rule for T-Bills or applies to any zero purchased with less than one year until maturity. If pressed, I believe it is a T-Bill specific rule. As an example, if you paid $9900 for the T-Bill and sold it before maturity for $9945, you will have to report $45 of interest and have a basis of $9945.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

[snip]

Thanks very much. Since I pay estimated tax, I need to figure my year's income, which led to my query. As best I can, I compute all income for the coming year on a spreadsheet, month by month and quarter by quarter.

For me, if I get a refund of $100, I think I should record it in my estimated income spreadsheet at maturity date (6 months hence) as interest. Right?

Reply to
Harry Thompson

Phil is right. I am wrong. I forgot that T-Bills up to 26 weeks are sold at a discount.

Reply to
Alan

T-Bills are sold for up to one year, and they're all sold as discount instruments. (Treasury Notes and Bonds are longer, sold around par, and pay coupons.)

Seth

Reply to
Seth

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