Treasury Bill Interest vs Return

Harry Thompson · Joined: 25 Aug 2007 Posts: 5

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

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Archived from group: misc>taxes>moderated

Alan · Joined: 12 Oct 2007 Posts: 93

Harry Thompson wrote:
> 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
>
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.

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Rich Carreiro · Joined: 25 Aug 2007 Posts: 32

Alan writes:

> Harry Thompson wrote:
> > 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
> >
> 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.

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Rich Carreiro rlc-news@rlcarr.com

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Harry Thompson · Joined: 25 Aug 2007 Posts: 5

"Rich Carreiro" wrote in message @swing-shift.time-tripper.com...
> Alan writes:
>
>> Harry Thompson wrote:
>> > I'm a little confused about what is taxable interest and when tax is
>> > due for Treasury Bills.

[snip]

> 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 rlc-news@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?

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Alan · Joined: 12 Oct 2007 Posts: 93

Rich Carreiro wrote:
>
> 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 rlc-news@rlcarr.com
>
Phil is right. I am wrong. I forgot that T-Bills up to 26 weeks
are sold at a discount.

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Seth · Joined: 25 Aug 2007 Posts: 177

In article ,
Alan wrote:

> 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

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