Here is how Treasury bonds are taxed in plain terms: the interest is subject to federal income tax at your ordinary-income rate, and it is exempt from all state and local income taxes. That single split, federal-taxable and state-exempt, drives almost every planning decision that follows for T-bills, T-notes, T-bonds, TIPS, and savings bonds.
For 2026, interest from Treasury bills, notes, and bonds is taxed at your federal ordinary-income rate (brackets run 10% to 37%) and is exempt from state and local income tax under 31 U.S.C. 3124 (Source: IRS Tax Topic 403; Cornell LII, 2026). Any gain from selling a Treasury before maturity is a capital gain, taxable at both the federal and the state level.
How is Treasury bond interest taxed at the federal level?
Treasury interest is taxed as ordinary income on your federal return. It is added to wages, pension income, and other ordinary income, then taxed at your marginal rate, which for 2026 ranges from 10% to 37% (Source: IRS Tax Topic 403; Rev. Proc. 2025-32, 2026). There is no preferential rate for the interest itself.
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This applies to the coupon payments on Treasury notes and bonds and to the built-in interest on Treasury bills. A T-bill pays no separate coupon; it is bought at a discount and matures at face value, and the difference is treated as taxable interest, not a capital gain, in the year the bill matures (Source: IRS Pub. 550, 2025).
Because the interest is fully taxable at the federal level, it lands inside your adjusted gross income. That matters beyond the tax line itself, because AGI and modified AGI feed Social Security benefit taxation and Medicare premiums, covered later in this guide.
Do you pay state taxes on Treasury bonds?
No. Interest from Treasury bills, notes, and bonds is exempt from all state and local income taxes (Source: IRS Tax Topic 403, 2026). The exemption is statutory, set by 31 U.S.C. 3124(a), which shields interest on obligations of the United States Government from state and local taxation (Source: Cornell LII, 31 U.S.C. 3124, 2026).
For an investor in a high-tax state, the mechanical effect is that two instruments paying the same headline yield are not taxed the same: the state taxes the full interest from a corporate bond or bank CD, while it taxes none of the Treasury interest. Whether that distinction matters in any given case depends on the investor’s own state and tax bracket.
One limit is easy to miss: the state exemption covers interest only. It does not cover a capital gain from selling a Treasury early, which is generally subject to state income tax like any other capital gain (Source: 31 U.S.C. 3124, 2026). The next section explains that split.
Are Treasury bonds taxed as capital gains or ordinary income?
Both can apply, depending on what happens. The interest is always ordinary income. A capital gain or loss arises only if you sell a Treasury on the secondary market before it matures for more or less than your cost basis (Source: IRS Pub. 550; IRS Tax Topic 409, 2026). Hold to maturity and you simply receive face value, so there is no capital gain on the principal.
Holding period sets the rate on a sale. A Treasury held one year or less produces a short-term gain taxed as ordinary income (up to 37% for 2026). Held more than one year, the gain is long-term and taxed at 0%, 15%, or 20% depending on taxable income (Source: IRS Tax Topic 409, 2026).
| Situation | Tax character | Federal rate (2026) | State/local tax |
|---|---|---|---|
| Interest received (any Treasury) | Ordinary income | 10% to 37% | Exempt |
| Sold before maturity, held 1 year or less | Short-term capital gain | Ordinary rate, up to 37% | Generally taxable |
| Sold before maturity, held more than 1 year | Long-term capital gain | 0% / 15% / 20% | Generally taxable |
| Held to maturity | No gain on principal | Not applicable | Not applicable |
Sales are reported on Form 8949 and summarized on Schedule D of Form 1040, using the Form 1099-B your broker issues (Source: IRS Pub. 550; IRS Tax Topic 409, 2026). A loss on an early sale can offset other capital gains and, within limits, ordinary income.
Phantom income on TIPS and STRIPS: the trap most guides skip
Some Treasuries generate taxable income you never receive in cash that year, a pattern often called phantom income. Treasury Inflation-Protected Securities (TIPS) and Treasury STRIPS both accrue income that is taxed annually even though no matching payment arrives, and it is reported to you on Form 1099-OID (Source: IRS Pub. 550, 2025).
With TIPS, the principal is adjusted upward with inflation. That annual increase in principal is taxed as ordinary interest income in the year it occurs, before you get it back at maturity or sale (Source: IRS Pub. 550, 2025). In a year of high inflation, a TIPS holder can owe tax on an inflation adjustment while receiving only a small cash coupon.
STRIPS are zero-coupon Treasuries created by separating the interest and principal payments. They pay nothing until maturity, yet the original issue discount (OID) accrues each year under a constant-yield method and is taxed annually as it accrues (Source: IRS Pub. 550, 2025). The holder reports interest income every year with no cash to show for it until the bond matures.
Because the tax lands before the cash, the mechanical interaction is that holding TIPS or STRIPS inside a tax-deferred account such as a traditional IRA means the annual accrual is not currently taxed; it is taxed later as ordinary income when funds are withdrawn. This describes how the rules interact and is not a recommendation for any individual.
The Net Investment Income Tax (NIIT) on Treasury income
Higher-income investors can owe an extra 3.8% Net Investment Income Tax on Treasury interest and on gains from selling Treasuries. NIIT applies to the lesser of net investment income or the amount by which modified AGI exceeds $200,000 for single filers and $250,000 for married filing jointly (Source: IRS, Questions and Answers on the Net Investment Income Tax; IRC 1411). These thresholds are set in statute and are not adjusted for inflation.
Treasury interest is investment income for this purpose, and the state exemption does not carry over to NIIT because NIIT is a federal tax. So a taxpayer over the threshold can face the ordinary-income rate plus 3.8% on the same Treasury interest (Source: IRC 1411; IRS Q&A on NIIT).
NIIT is easy to overlook, yet it changes the marginal cost of Treasury income for households near or above those thresholds. Q3 Advisors maintains a separate explainer on the Net Investment Income Tax for 2026 for readers who want the mechanics.
Premium, discount, and market discount rules
The price you pay for a Treasury relative to its face value changes how it is taxed over its life. A bond bought at par is straightforward: you report the stated interest and have no gain or loss on principal at maturity. Buying at a premium or a discount adds annual adjustments that can change both the taxable interest you report and your cost basis (Source: IRS Pub. 550, 2025).
If you buy a taxable Treasury at a premium (above face value), you may elect to amortize the bond premium, which reduces the taxable interest you report each year and lowers your basis accordingly (Source: IRS Pub. 550, 2025). Without the election, the premium is generally recovered as a capital loss at maturity or sale.
If you buy a Treasury on the secondary market below its adjusted issue price, market discount rules apply. Accrued market discount is generally taxed as ordinary income when you sell or when the bond matures, rather than as a capital gain, unless you elect to include it in income as it accrues (Source: IRS Pub. 550, 2025). A small de minimis discount can be treated as capital gain instead.
How to report Treasury bond interest on your taxes
You must report Treasury interest on your federal return whether or not a form arrives, and the exact paperwork depends on how much interest you earned and whether you sold any Treasury before maturity. Interest goes on Form 1040, larger amounts add Schedule B, and any sale flows through Form 8949 to Schedule D (Source: IRS Tax Topic 403; IRS Pub. 550, 2025). Here is the typical sequence.
- Collect your Form 1099-INT. Treasury interest appears in Box 3, which is set aside for interest on U.S. savings bonds and Treasury obligations (Source: IRS Pub. 550, 2025). A payer must issue a 1099-INT once interest reaches $10 for the year.
- Collect Form 1099-OID if you held TIPS, STRIPS, or other discount instruments, which reports accrued income even without a cash payment (Source: IRS Pub. 550, 2025).
- Enter the interest on Form 1040. If your total taxable interest exceeds $1,500, attach Schedule B (Form 1040) listing each payer (Source: IRS Tax Topic 403, 2026).
- If you sold a Treasury before maturity, report the sale on Form 8949 using your Form 1099-B, and carry the total to Schedule D (Source: IRS Tax Topic 409, 2026).
You must report all taxable interest even if no 1099 arrives (Source: IRS Tax Topic 403, 2026). Interest earned directly through a TreasuryDirect account is reported the same way; TreasuryDirect provides the 1099 forms electronically.
How each type of Treasury and savings bond is taxed
Every direct Treasury security follows the same core rule: interest is taxable at the federal level and exempt from state and local income tax. What differs by type is the timing of the tax and the form it is reported on, ranging from coupons taxed as paid to discount that accrues and is taxed yearly. The table below summarizes the main instruments, with municipal and corporate bonds shown for contrast (Source: IRS Pub. 550; IRS Tax Topic 403, 2026).
| Security | Federal tax on interest | State/local tax | Timing note |
|---|---|---|---|
| Treasury bills (T-bills) | Ordinary income | Exempt | Discount taxed as interest at maturity |
| Treasury notes (T-notes) | Ordinary income | Exempt | Coupon taxed as paid |
| Treasury bonds (T-bonds) | Ordinary income | Exempt | Coupon taxed as paid |
| TIPS | Ordinary income | Exempt | Inflation adjustment taxed yearly (1099-OID) |
| STRIPS | Ordinary income | Exempt | OID accrues and is taxed yearly |
| Series EE savings bonds | Ordinary income | Exempt | Interest can be deferred until redemption |
| Series I savings bonds | Ordinary income | Exempt | Interest can be deferred until redemption |
| Municipal bonds (contrast) | Generally exempt | Varies by state | Often federal tax-free |
| Corporate bonds (contrast) | Ordinary income | Taxable | No federal or state exemption |
Are I bonds and EE bonds taxed the same as Treasury bonds?
The federal-taxable, state-exempt rule is the same, but savings bonds add two features Treasury notes and bonds do not have: interest deferral and an education exclusion. Series EE and Series I interest can be deferred and reported all at once when the bond is redeemed or reaches final maturity, up to 30 years (Source: IRS Pub. 550, 2025).
That deferral means many savings-bond holders report no interest for years, then a large amount in the redemption year, which can push income into a higher bracket in a single year. Reporting the interest annually instead is an alternative the rules allow, though it must then be applied consistently.
The savings-bond education exclusion
Interest on Series EE and Series I bonds can be excluded from federal income entirely if the proceeds pay qualified higher-education expenses in the redemption year, claimed on Form 8815 (Source: IRS Pub. 550, 2025). The exclusion phases out above a modified AGI limit that is adjusted annually, and the bonds must be registered in the name of an owner who was at least 24 when the bond was issued.
Treasuries inside retirement accounts and the Roth angle
Where you hold a Treasury changes when the interest is taxed. Inside a traditional IRA or 401(k), Treasury interest is not taxed as it accrues; it is taxed later as ordinary income when withdrawn (Source: IRS Pub. 550; IRS Pub. 590-B, 2025). Inside a Roth IRA, qualified growth and withdrawals can be tax-free, so the interest may never be taxed again.
One point often missed: a taxable account already gives you the state exemption, while an IRA adds no state benefit because the eventual withdrawal is taxed as ordinary income by many states.
Because Treasury interest sits inside AGI, it also affects the room you have for a Roth conversion in a given year, since a conversion stacks on top of your existing ordinary income and modified AGI. The interaction is mechanical: the more Treasury interest already counted in AGI, the less room remains before the next tax bracket or IRMAA threshold when a conversion is layered on top. This is neutral education, not a recommendation.
The fund reporting trap: mutual funds and ETFs
Owning Treasuries through a mutual fund or ETF can quietly cost you the state exemption if you rely only on the fund’s 1099. A fund’s Form 1099-DIV or 1099-INT often reports total interest without isolating the state-exempt Treasury portion, so a taxpayer who simply copies the box figure onto a state return may overpay state tax (Source: IRS Pub. 550, 2025).
Fund companies typically publish a separate year-end letter stating the percentage of income derived from U.S. government obligations. Applying that percentage on the state return is what preserves the exemption; some states also impose a minimum-holding threshold before the exemption applies. Checking the fund’s government-obligations disclosure each year is how many investors avoid the trap.
Ripple effects: Social Security, Medicare, and MAGI cliffs
Because Treasury interest is taxable and sits in AGI, it can raise two retirement costs that surprise people. It counts toward the combined income that determines how much of your Social Security is taxable, and it counts toward the modified AGI that sets Medicare premiums two years later.
For Social Security, combined income equals AGI plus nontaxable interest plus half of benefits. Treasury interest is already in AGI, so it raises combined income directly. Single filers between $25,000 and $34,000 can have up to 50% of benefits taxed, and above $34,000 up to 85%; for joint filers the ranges are $32,000 to $44,000 and above $44,000 (Source: IRS, Social Security benefits may be taxable; IRS Pub. 915, 2025). These base amounts are set in statute and are not inflation-indexed, a dynamic explained in the Social Security tax torpedo guide.
For Medicare, the income-related monthly adjustment amount (IRMAA) is a cliff: one dollar over a bracket triggers the full step-up for the year. The 2026 standard Part B premium is $202.90 per month, and IRMAA can raise the total to as much as $689.90 per month at the top tier (Source: CMS, 2026 Medicare Parts A and B Premiums and Deductibles, released Nov. 14, 2025). A burst of taxable Treasury interest that pushes MAGI over a line can lift premiums for a full year, as detailed in the 2026 IRMAA brackets guide.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This article is educational and is not advice; for guidance on your own circumstances, consult a qualified tax or financial professional.
Frequently asked questions
Do you pay state taxes on Treasury bonds?
No. Interest from Treasury bills, notes, and bonds is exempt from all state and local income taxes under 31 U.S.C. 3124 (Source: IRS Tax Topic 403; Cornell LII, 2026). The exemption covers interest only. A capital gain from selling a Treasury before maturity is generally taxable by your state, and the exemption does not extend to it.
How do I avoid paying taxes on Treasury bonds?
Federal tax on Treasury interest cannot be avoided outright, though several provisions in the tax code affect its timing or amount. Interest on Treasuries held in a traditional IRA is deferred until withdrawal, qualified Roth IRA growth can be tax-free, and Series EE or I bond interest used for qualified higher-education expenses may be excluded on Form 8815 (Source: IRS Pub. 550; IRS Pub. 590-B, 2025). Eligibility for each provision varies by individual.
Are Treasury bonds taxed as capital gains or ordinary income?
The interest is always ordinary income, taxed federally at 10% to 37% for 2026. A capital gain arises only if you sell before maturity for more than your basis; held one year or less it is short-term (ordinary rates), and held more than one year it is long-term at 0%, 15%, or 20% (Source: IRS Tax Topic 403; IRS Tax Topic 409, 2026).
How much tax do you pay on Treasury bills?
T-bill income is taxed as ordinary interest at your federal marginal rate (10% to 37% for 2026) and is exempt from state and local income tax (Source: IRS Tax Topic 403, 2026). A T-bill pays no coupon; the gap between its discounted purchase price and its face value at maturity is treated as interest, not capital gain (Source: IRS Pub. 550, 2025).
Do I have to report Treasury bond interest on my taxes?
Yes. You must report all taxable interest on your federal return even if you receive no Form 1099-INT or 1099-OID (Source: IRS Tax Topic 403, 2026). Treasury interest appears in Box 3 of Form 1099-INT, and Schedule B is required when your total taxable interest exceeds $1,500 for the year.
Are I bonds and EE bonds taxed the same as Treasury bonds?
The core rule matches: interest is federally taxable and state-exempt. Savings bonds add two features, the option to defer interest until redemption (up to 30 years) and an education exclusion on Form 8815 for qualified tuition, subject to a modified AGI phase-out (Source: IRS Pub. 550, 2025). Treasury notes and bonds do not offer that deferral.
Is Treasury bond interest taxed federally?
Yes. Interest from Treasury bills, notes, and bonds is subject to federal income tax at ordinary-income rates, which range from 10% to 37% for 2026 (Source: IRS Tax Topic 403; Rev. Proc. 2025-32, 2026). Higher-income investors may also owe the 3.8% Net Investment Income Tax on that interest above statutory MAGI thresholds (Source: IRC 1411; IRS Q&A on NIIT).
Sources
IRS, Tax Topic No. 403, Interest received: https://www.irs.gov/taxtopics/tc403 (2026)
IRS, Tax Topic No. 409, Capital gains and losses: https://www.irs.gov/taxtopics/tc409 (2026)
IRS, Publication 550 (2025), Investment Income and Expenses: https://www.irs.gov/publications/p550
IRS, Publication 915 (2025), Social Security and Equivalent Railroad Retirement Benefits: https://www.irs.gov/publications/p915
IRS, Publication 590-B (2025), Distributions from Individual Retirement Arrangements: https://www.irs.gov/publications/p590b
IRS, Questions and Answers on the Net Investment Income Tax; Internal Revenue Code Section 1411
IRS, IRS reminds taxpayers their Social Security benefits may be taxable: https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable
IRS, Rev. Proc. 2025-32, tax inflation adjustments for tax year 2026: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
Cornell Legal Information Institute, 31 U.S.C. 3124: https://www.law.cornell.edu/uscode/text/31/3124
CMS, 2026 Medicare Parts A and B Premiums and Deductibles (released Nov. 14, 2025): https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles
