Confused about accrued market discount on my T-Bill - how to report this on my tax return?

T-Bills with accrued market discount require specific tax treatment. When you purchase a T-Bill on the secondary market below its face value (at a discount), that discount amount is typically treated as interest income when you sell or redeem it. The accrued market discount shown on your 1099B should be reported as interest income on Schedule B, not as a capital gain. This is because the IRS views market discount on Treasury securities as interest income that accrues over the holding period. In TurboTax, you'll want to enter this in the Interest Income section, not in the Investment Sales section where you'd report other 1099B items. Make sure to note it as "Accrued Market Discount" so it's properly categorized. The proceeds and cost basis from the 1099B would still be entered in the investment sales section, but the market discount amount gets reported separately as interest.

I ran into this exact same problem last year with some T-Bills I was trading. After hours of research and getting nowhere, I finally used taxr.ai (https://taxr.ai) to analyze my 1099B and figure out exactly how to report it. Their AI actually explained the split reporting needed for accrued market discount and showed me examples of how to fill out the forms correctly. The tool basically confirmed what Profile 5 is saying - you have to report the market discount as interest income on Schedule B, not as part of your capital gain/loss calculation. I was getting so frustrated trying to figure this out until I uploaded my forms and got a clear explanation. Their system even pointed out a small reporting error my broker had made on the 1099B that I wouldn't have caught otherwise.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. Honestly it was really helpful with my bond taxation questions! I uploaded my 1099s and it immediately identified my market discount issues and clarified how they should be reported. For my situation, I had both OID and market discount on different bonds, and the tool correctly separated how each should be treated. It even generated a nice report explaining the tax treatments that I could share with my accountant. He was impressed and said it saved him research time. What I found most helpful was how it explained the differences between the various types of bond income and discounts in plain English. It also showed exactly which boxes on which forms relate to each type of income. Money well spent considering how many hours of frustration it saved me!

If you're still having trouble with the IRS guidance on this, you might want to call them directly. I tried for 3 weeks to get someone on the phone at the IRS to explain how to handle market discount on T-bills and kept getting disconnected after holding for 2+ hours. I finally used Claimyr (https://claimyr.com) to get through to an actual human at the IRS. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. They basically hold your place in line and call you when an agent picks up. The IRS representative confirmed exactly what others have said here - accrued market discount gets reported as interest income on Schedule B. The nice thing about having an actual IRS person confirm it was that I got their badge number, so if there's ever an audit question, I have documentation that I followed their guidance. Definitely worth it for peace of mind on these confusing tax situations.

I have to eat my words and apologize for being skeptical. After my accountant made a mistake on my T-Bill market discount reporting last year that resulted in a CP2000 notice, I finally broke down and tried Claimyr to talk directly to the IRS about how to correctly report it this year. Got through to an agent in about 45 minutes (after previous attempts where I personally waited on hold for 2+ hours and eventually gave up). The agent walked me through exactly how to report T-Bill market discount on Schedule B vs the regular proceeds/basis on Schedule D. They confirmed that accrued market discount must be reported as interest income, separate from the capital gain/loss calculation. Having direct confirmation from the IRS has given me peace of mind that I'm doing it correctly this time. Sometimes you have to admit when you're wrong, and I was definitely wrong about Claimyr. Sorry for the skepticism!

Here's another important detail that hasn't been mentioned yet - you need to check if your broker is using the constant yield method or straight-line method for calculating the accrued market discount. The calculation method can affect the amount of interest income you report. Most brokers use straight-line by default, but you can elect to use constant yield (which is slightly more favorable typically). This election must be made on your tax return in the year you acquire the debt instrument. If you've already been reporting other bonds a certain way, you should maintain consistency. Also, if you're dealing with a lot of these transactions, consider downloading IRS Publication 550 which has a whole section on market discount rules. The T-Bill rules are a bit different from corporate bonds.

Has anyone had this issue with multiple T-Bills across different brokers? I'm getting inconsistent reporting with some showing market discount on 1099-INT and others on 1099B. Super confused about how to reconcile these.

This is exactly the kind of confusing tax situation that trips up so many people! I went through something similar with Treasury securities last year. One thing that helped me was keeping a detailed spreadsheet of all my bond transactions with acquisition dates, sale dates, and the specific reporting each broker provided. The key insight that finally clicked for me was understanding that the IRS treats market discount as "interest that should have been earned" rather than a capital gain. That's why it gets reported as interest income on Schedule B even though it shows up on your 1099B form. For anyone dealing with this regularly, I'd also recommend setting up a separate folder just for bond-related tax documents. Between 1099-INT forms, 1099B forms, and all the supplementary broker statements explaining their calculations, it can get overwhelming fast. Having everything organized by security type and date makes tax time much less stressful. The good news is once you understand the pattern, it becomes much easier to spot and handle correctly in future years!

One additional thing to watch out for - if you're planning to continue trading T-Bills, you might want to consider making the de minimis election under Section 1273(a)(3). If the market discount is less than 0.25% of the face value multiplied by the number of complete years to maturity, you can elect to treat it as zero (meaning no interest income to report). For example, if you have a T-Bill with a face value of $10,000 maturing in 6 months, and the market discount is less than $12.50 (0.25% × $10,000 × 0.5 years), you could potentially elect to treat the discount as zero. This can simplify your tax reporting significantly if you're doing a lot of short-term T-Bill trading. The election is made by attaching a statement to your return, but like the constant yield method election, it needs to be made in the year you acquire the security. Worth considering for future purchases if you find yourself dealing with small market discount amounts regularly!

This thread has been incredibly helpful! I just want to add one more practical tip for anyone using TurboTax specifically. When you're entering the accrued market discount as interest income, make sure to enter it in the "Other Interest Income" section rather than trying to add it to any existing 1099-INT entries you might have. In TurboTax, go to Federal Taxes > Wages & Income > Interest and Dividends, then scroll down to the "Other Interest Income" section. Enter the $437 (or whatever your amount is) there and label it clearly as "Accrued Market Discount - T-Bill" in the description field. This keeps it separate from your regular interest income and makes it easier to track if you ever need to reference it later. The investment sales portion (for the proceeds and cost basis from your 1099B) should be entered separately in the Investment Income section under "Stocks, Mutual Funds, Bonds, Other." TurboTax will automatically calculate any capital gain/loss from that information. I learned this the hard way after initially trying to modify my 1099-INT entries and creating a mess that took forever to untangle. Keeping the market discount separate as "other interest income" is definitely the cleaner approach!