Are Returns from Treasury Bonds Considered Capital Gains or Interest Income?

The returns you get from treasury bonds are actually treated differently depending on the specific component. For the coupon payments you mentioned, you're absolutely right - those are considered interest income and will be taxed at your ordinary income tax rate. As for what happens at maturity, if you bought the bond at a discount to face value (like with zero-coupon bonds), the difference between what you paid and the face value you receive at maturity is considered interest income, not capital gains. This is called "original issue discount" or OID, and it's taxed as ordinary income. You only have capital gains/losses with treasury bonds if you sell them before maturity on the secondary market for more or less than your adjusted basis. The adjusted basis includes any OID you've already been taxed on (yes, you can be taxed on OID annually even though you haven't received the money yet - fun stuff!). If you hold until maturity, there's no capital gain component.

After spending HOURS trying to figure out my treasury bond taxes last year, I discovered this amazing tool at https://taxr.ai that completely saved me. I had a mix of different treasuries (T-bills, T-notes, some I sold early, others I held to maturity) and was so confused about what was interest vs capital gains. The tool analyzed all my treasury transactions and properly categorized everything - showing which parts were interest income vs capital gains. It even handled the weird OID (original issue discount) calculations for my zero-coupon bonds that the previous commenter mentioned. It pulled everything together into a really clear report that showed exactly what to put on each tax form line.

I was really skeptical about using taxr.ai when I mentioned it in my earlier comment, but I decided to give it a try with my complicated treasury bond situation. Honestly, I'm shocked at how well it worked. I had this weird situation with some treasury notes I bought at a premium (above face value) and the tool correctly figured out that I needed to amortize that premium over the life of the bond. My broker's 1099 just lumped everything together which would have resulted in me overpaying taxes. It also identified a mistake in how my broker reported a zero-coupon bond I sold early. The tool separated out how much of my return was accumulated interest versus the actual capital gain portion from market price changes. Saved me from a potential audit headache and about $340 in taxes!

If you're struggling to get answers about your treasury bond tax questions from the IRS, try https://claimyr.com. I spent WEEKS trying to reach an IRS agent about my treasury bond tax confusion last year. Their website was useless for my specific situation and the regular phone line kept disconnecting me after 2+ hour waits. I found Claimyr which gets you past the IRS phone tree and holds your place in line. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c - basically it navigates the phone menus and waits on hold for you, then calls you when an actual IRS agent picks up. I used it and finally got a real person who explained exactly how to report my treasury bond interest and which forms to use. Totally worth it to get a definitive answer directly from the IRS instead of guessing.

Well I feel like an idiot. After being super skeptical about Claimyr in my previous comment, I tried it yesterday out of desperation after my accountant gave me conflicting info about how to report some treasury bonds I sold early. It actually worked exactly as advertised. I got connected to an IRS tax specialist in about 47 minutes (versus the 3+ hours I wasted last week trying on my own and never getting through). The agent confirmed that when I sold my treasuries before maturity, I needed to report the accrued interest as interest income on Schedule B, and then report the actual gain/loss from selling at market price separately as capital gain/loss on Schedule D. The agent even emailed me the specific publication sections that covered my situation. Maybe the IRS isn't completely unreachable after all - you just need the right tool to break through their phone system.

Don't forget that if you're buying treasuries through a brokerage account, they should be sending you a 1099-INT that reports the interest income for you. But here's the tricky part - if you're buying directly from TreasuryDirect.gov, you won't get a 1099! You have to track and report that interest yourself. Also, if you're buying a lot of treasuries, consider holding them in a tax-advantaged account like an IRA. That way you can defer (traditional) or eliminate (Roth) taxes on the interest altogether.

Has anyone used TurboTax for reporting treasury bond income? I'm wondering if it correctly handles the distinction between discount interest and actual capital gains if you sell early. I've got about 15 different treasury securities and I'm trying to avoid paying my accountant $300/hr to figure this all out.

One important thing to consider that hasn't been mentioned yet is the state tax implications. Treasury bond interest is exempt from state and local taxes, which can be a significant advantage depending on where you live. So while you'll pay federal income tax on the interest (including the discount amount at maturity for zero-coupon bonds), you won't owe state taxes on that same income. This makes treasuries particularly attractive if you're in a high-tax state like California or New York. Just make sure when you're doing your state tax return that you properly exclude the treasury interest from your state taxable income. Most tax software handles this automatically, but it's worth double-checking since the savings can be substantial.