Is U.S. Treasury Interest Taxable?
U.S. Treasury securities are often treated as a storage place for business cash that isn’t needed at the moment. They’re backed by the U.S. government, available in a range of maturities, and generally easy to sell before maturity. They can also generate a good amount of interest. But is that interest taxable?
In short, the answer is yes – but not in the same way typical income is. In this guide, we’ll explain how Treasury bills, notes, and bonds generate income, how that income is taxed, and which tax forms and special rules businesses should know. If you’re interested in earning high yields without the stress of managing Treasury securities yourself, you may want to consider Slash.⁶ Through Slash Treasury, businesses can earn up to 4.01% annualized yield on idle funds with money market investments from Morgan Stanley and BlackRock.
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Key Takeaways
- Treasury interest is taxable at the federal level, but exempt from state and local income taxes. It’s taxed at ordinary income rates rather than the lower rates that can apply to long-term capital gains.
- Rolling a matured bill straight into a new one doesn’t defer anything, since the interest is reportable in the year it was earned even though the cash never left your account.
- TIPS inflation adjustments are reported on Form 1099-OID and can be taxable before you actually receive the added principal at maturity, which creates a tax bill ahead of the cash.
- A Treasury fund’s distribution only partly qualifies for state relief if the fund also holds repurchase agreements or corporate bonds.
- The exemption covers state income tax, but not every state-level business tax. Federal law still permits nondiscriminatory franchise and similar nonproperty taxes on corporations.
What Are U.S. Treasury Securities?
U.S. Treasury securities are debt obligations issued by the federal government. Buying one is essentially a way to lend money to the government for an agreed period. In exchange, the government promises to repay the security’s face value and provide a return through interest payments, a purchase discount, or both.
Treasuries help fund federal operations and are backed by the full faith and credit of the United States. They’re also marketable, meaning they can generally be transferred or sold before maturity. A business doesn’t necessarily have to lock its money away for the entire term, although selling early can mean missing out on extra profit.
For businesses, Treasuries can serve several purposes. Short-term securities may provide a place to hold cash reserved for payroll, taxes, inventory, or another planned expense. Treasuries may also offer a better after-tax yield than a similarly priced deposit product because their interest receives favorable treatment at the state and local levels.
The three primary types are:
- Treasury bills: T-bills mature in four to 52 weeks, and they usually don’t make regular interest payments. Instead, they’re sold at face value or at a discount, and pay their full face value at maturity.
- Treasury bonds: Treasury bonds have maturities of 20 or 30 years. They pay a fixed rate of interest every six months and return the face value at maturity.
- Treasury notes: Treasury notes have terms of two, three, five, seven, or ten years. Like bonds, they pay interest every six months.
All three are considered relatively low-risk investments because they’re federal government obligations. They aren’t the same as an FDIC-insured bank account, however, and their market value can change before maturity.
How do Treasury securities gain interest?
Treasury bills earn interest through the difference that grows between their purchase price and face value. Suppose a business buys a $100,000 T-bill for $98,300. When the bill matures, the Treasury pays the business $100,000. The $1,700 difference is the business’s interest income.
That income is still reportable if the company immediately uses the proceeds to buy another Treasury. Rolling a maturing bill into a new security keeps the cash invested, but it doesn’t defer tax on interest already earned.
Notes and bonds use a more gradual structure. Their interest rate is established when the security is auctioned, and the owner receives a payment every six months. If a business holds a $100,000 note with a 4% coupon, it would generally receive two $2,000 payments each year. The Treasury returns the $100,000 face value at maturity.
The coupon rate doesn’t always equal the security’s effective yield. Notes and bonds can be issued or traded above or below face value, and their prices move as prevailing Treasury rates change. Selling before maturity could therefore create a gain or loss. Buying at a premium or discount can also introduce separate tax implications for the bond premium, market discount, or original issue discount.
The Tax Treatment of Treasury Interest
The main rule is pretty straightforward: interest from Treasury bills, notes, and bonds is taxable at the federal level, but exempt from state and local income taxes. The IRS generally treats the payments as interest income, meaning they’re taxed at the taxpayer’s applicable ordinary income tax rate rather than the lower rate that may apply to certain long-term capital gains.
For a T-bill, the taxable interest is generally the difference between the discounted purchase price and the face value paid at maturity. For notes and bonds, the semiannual coupon payments are taxable in the year they’re received or accrued, depending on the business’s accounting method.
Let’s picture a company that earns $10,000 in Treasury interest during the year. That amount generally becomes part of its federal taxable income. When the company prepares its state income tax return, the Treasury interest will generally be subtracted from the income that’s subject to state tax. In a high-tax state, that exemption can affect the investment’s after-tax yield.
The exemption applies to interest from federal obligations, but it doesn’t necessarily cover every profit connected to them. If a business sells a note or bond for more than its adjusted tax basis, the gain may be taxable separately. Accrued interest included in a sale price must also be separated from the gain or loss on the security itself.
Treasury funds typically require some extra review. A mutual fund or ETF holding only U.S. government obligations may pass through income that qualifies for state tax relief. If it also owns repurchase agreements, corporate bonds, or other assets, only part of its distribution may qualify. The fund’s annual tax supplement should identify the eligible percentage.
Depending on where you live, there may also be some narrow exceptions to the state tax exemption. Federal law allows states to impose certain nondiscriminatory franchise or similar nonproperty taxes on corporations. So, you shouldn’t assume that Treasury income is automatically excluded from every state-level business tax simply because it’s exempt from state income tax.
Forms and rules to know
The most important form when it comes to U.S. Treasury interest is Form 1099-INT, as you’ll document your interest from Treasury obligations in box 3. TreasuryDirect makes its tax forms available at the beginning of the following year, while businesses purchasing through a brokerage generally receive the form from their broker.
Here are three other forms that may apply depending on the security and transaction:
- Form 1099-OID: Reports original issue discount. TreasuryDirect also uses it to report annual inflation adjustments to the principal of Treasury Inflation-Protected Securities. Those adjustments can be taxable before the additional principal is received at maturity.
- Form 1099-B: May report proceeds from securities that were sold, redeemed, or matured. It’s important to note that the proceeds aren’t necessarily the taxable gain. A business must compare them with its adjusted basis and account for any premium, discount, or accrued interest.
- Schedule B: You’ll generally use Schedule B with Form 1040 when taxable interest and ordinary dividends exceed $1,500 or another listed condition applies. It may be relevant to sole proprietors and owners receiving pass-through income, but business entities report interest through their applicable returns.
Receiving a tax form doesn’t always mean the amount can be copied directly onto a return. For example, a note bought between interest-payment dates may include accrued interest paid to the seller, and a secondary-market purchase can carry a market discount or bond premium. A business may also have to adjust its basis when premium is amortized or the original issue discount is included in income.
In any case, you should keep purchase confirmations, maturity notices, brokerage statements, and records that show the price paid for each security. It’s also smart to separate Treasury interest from other interest in your accounting system, since the state-level subtraction can become clearer. This is a lot easier on a platform like Slash, which carries a Treasury account natively and integrates with popular accounting apps like QuickBooks Online and NetSuite.
Finally, TreasuryDirect allows investors to request federal withholding from interest payments, but withholding is not required in every account. You may instead need to include Treasury income in your estimated tax calculations. Because your entity structure, accounting method, and secondary-market activity can change the result, you might want to confirm your reporting approach with a tax professional if you have substantial Treasury holdings.
How Slash Can Help You Earn High Yield on Treasury Securities
Normally, the act of attending government auctions and buying securities is a project that most business owners either don’t understand or don’t have time to try. We built Slash Treasury to make it easier.
Slash is a business banking platform¹ that comes with a corporate card program, stablecoin support, accounting automations, a Treasury account, and a lot more.⁴ Through Morgan Stanley’s MULSX and BlackRock’s TSTXX, users can earn up to 4.01% annualized yield on their idle cash. Slash invests through these funds on your behalf, meaning you can focus more time on your business while reaping the rewards of a dedicated treasury strategy.
With the help of our real-time dashboard and our integrations with QuickBooks Online, Sage Intacct, Xero, and NetSuite, identifying your treasury income and setting it aside for tax season is a lot simpler than it could be if you’re managing it all by yourself.
Along with a Treasury account, Slash users get the following features:
- The Slash Visa® Platinum Card: The Slash Card is a corporate charge card that allows you to set customizable spending controls and issue unlimited virtual cards for handling team expenses, vendor payments, subscriptions, and more. Users can also earn up to 2% cash back on eligible business purchases.
- Working capital financing: Access short-term financing with flexible 30-, 60-, or 90-day repayment terms to help bridge cash flow gaps.⁵
- Payment processing: Let customers pay your invoices by card, add secure checkout components to your existing webpage, track payments from purchase to payout, and manage your incoming revenue from the Slash dashboard.
- Global USD: The Slash Global USD account is designed as an alternative for foreign founders who want access to USD without forming a US entity.³ Accounts are backed on Base by a balance held in USDC, which is designed to maintain a one-to-one value with the US dollar.
- Reimbursements: Instead of managing reimbursements across multiple tools, teams can submit, review, and approve reimbursements directly inside the Slash dashboard. Connect your bank account, upload your receipt, and let Slash capture the details.
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Frequently Asked Questions
What is annualized yield?
Annualized yield is a type of return that appears as a yearly rate so you can compare instruments with different terms, which is why a 13-week bill and a money market fund can be quoted side by side. For funds, the figure is typically derived from a recent period (such as a seven-day yield) and then scaled to a full year, which means it describes current conditions rather than what you’ll actually earn over the next twelve months.
Annualized Yield: How Treasury Accounts Generate Returns
Does the state tax exemption pass through to owners of an LLC or S corporation?
Usually, yes. The catch is that state conformity varies, and the subtraction has to be claimed on the individual return rather than automatically triggered. You should keep the entity-level records and any fund tax supplement, since you may need them to support the subtraction.
S-Corp vs C-Corp: Key Differences Explained
What if my business is in a state with no income tax?
Well, then the exemption is worth nothing to you. You can instead compare Treasury yields against deposit and money market yields on a gross basis, since the after-tax advantage that makes Treasuries attractive in California or New York simply doesn’t exist in Texas or Florida.
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