Treasury Bill Interest vs Return

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.

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

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?

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

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