How to report accrued interest vs capital gains when selling treasury bills early?

Yes, you definitely need to separate these components for proper tax reporting. When you sell a Treasury bill before maturity, the sale price gets broken down into two parts: 1) The accrued interest portion - this is reported as interest income on Schedule B and is exempt from state income taxes (since it's from a Treasury security). Your brokerage should provide this amount on your 1099-INT. 2) The difference between your purchase price and the sale price (minus the accrued interest) is your capital gain or loss, which gets reported on Schedule D. The reason for separating them is exactly what you mentioned - the interest component from Treasury securities is exempt from state taxes, but capital gains typically aren't. Your brokerage statement or year-end tax documents should break this down for you, showing both the interest income and any capital gain/loss separately.

Speaking from experience, this reporting can get really complicated and errors can be costly. I was in a similar situation last year and ended up using taxr.ai (https://taxr.ai) to help me sort through my brokerage statements and tax forms. Their AI analyzed my documents and correctly identified the accrued interest vs capital gain components for my Treasury securities. The tool flagged that my broker had improperly reported some of my Treasury interest, which would have caused me to overpay on state taxes. It was especially helpful because I had multiple T-bill transactions throughout the year and keeping track of the correct categorization for each one was becoming a nightmare.

Just wanted to follow up here. I decided to try taxr.ai after my initial skepticism, and I'm genuinely impressed. I uploaded my brokerage statements from both Schwab and Vanguard where I had several Treasury transactions, and it correctly identified all the accrued interest components. It even created a detailed report showing exactly how much of my Treasury interest was exempt from state taxes, with each transaction broken down individually. This was particularly helpful because my state return doesn't have clear guidance on how to report this exemption. Saved me a lot of confusion and potential errors!

For anyone struggling with getting IRS guidance on Treasury securities tax treatment, I found a good solution. After waiting on hold with the IRS for hours over multiple days, I used Claimyr (https://claimyr.com) and they got me connected to an IRS agent in about 15 minutes. The IRS agent confirmed that accrued interest and capital gains on Treasury bills are indeed reported separately, and walked me through the exact forms to use. There's even a video showing how it works here: https://youtu.be/_kiP6q8DX5c if you're curious. Definitely beats waiting on hold for hours only to have the call dropped.

I need to apologize for my skepticism about Claimyr. I was desperate enough to try it after another failed 2-hour hold with the IRS that ended in a disconnection. Less than 20 minutes after using their service, I was talking to an actual IRS representative who helped clarify my Treasury bill reporting questions. The agent confirmed that for Treasury bills sold before maturity, the accrued interest portion needs to be reported on Schedule B as interest income (exempt from state tax), while any premium/discount is reported separately as capital gain/loss on Schedule D. Would have taken me weeks to get this information without getting through. Really wish I had known about this service sooner!

Something everyone seems to be missing here - you need to be careful about the original issue price (OID) reporting as well. Treasury bills are sold at a discount, and technically the "interest" is the difference between what you paid and face value. If you bought the T-bill at original auction, you'll get a 1099-OID. If you bought it on the secondary market and then sold it, the reporting gets even more complicated because you need to account for acquisition premium or market discount. This affects how much is interest vs. capital gain.

Does anyone know if tax software like TurboTax handles this Treasury bill split reporting correctly? I'm concerned I'll miss something important.

One thing to keep in mind is that if you're dealing with multiple T-bill transactions throughout the year, maintaining detailed records is crucial. I learned this the hard way when I had to reconstruct my purchase dates, sale dates, and accrued interest calculations for about 8 different Treasury bills. What really helped me was creating a simple spreadsheet tracking each transaction with columns for: purchase date, maturity date, sale date, purchase price, sale price, days held, and calculated accrued interest. This made it much easier when tax time came around to properly allocate between interest income and capital gains. Also worth noting - if you're buying T-bills as part of a tax strategy (like for estimated payments), make sure you understand the timing implications. The accrued interest is taxable in the year you receive it (when you sell), not when the bill would have originally matured.

Great breakdown everyone! I've been dealing with this exact situation and wanted to add one more consideration that caught me off guard. When you sell Treasury bills early, make sure to check if your state has any specific forms or schedules for reporting the tax-exempt interest portion. In my state (California), I had to use a separate worksheet to calculate the exempt interest amount and then subtract it from my federal adjusted gross income. The tricky part was that the state form required me to identify the exact amount of Treasury interest, not just lump it in with other interest income. Also, for those using tax software, double-check that it's properly categorizing your Treasury interest as state-exempt. I caught an error where TurboTax was treating some of my Treasury interest as regular taxable interest for state purposes. Had to manually override it to get the correct state tax calculation. Keep excellent records of your Treasury transactions - the IRS and state tax agencies are getting more sophisticated about cross-referencing these types of transactions, especially with the increased popularity of Treasury bills for cash management.

This is such a timely discussion! I just went through this exact scenario with some 4-week T-bills I had to sell early for an unexpected expense. What really helped me was calling my broker (Schwab) directly and asking them to walk through my 1099 forms before they were finalized. They were able to show me exactly how they calculated the accrued interest portion versus the capital gain/loss components. Turns out they have a specific department that handles fixed income securities, and they're much more knowledgeable about Treasury reporting than the general customer service reps. One thing I learned that wasn't mentioned yet - if you're doing this regularly (buying and selling T-bills for cash management), consider setting up a dedicated spreadsheet or using portfolio tracking software. The compound effect of multiple transactions can make year-end tax prep really complex, especially when you're trying to optimize for state tax exemptions. Also want to echo what others said about keeping detailed records. The IRS has been sending out more CP2000 notices (automated underreporter inquiries) for Treasury securities lately, so having your calculations documented upfront can save you a lot of headache later.

I appreciate everyone's detailed explanations here - this thread has been incredibly helpful! I'm dealing with a similar situation but with a twist: I purchased T-bills through multiple brokers (TreasuryDirect, Fidelity, and Schwab) throughout the year and sold some from each platform early. What's making this particularly complicated is that each broker seems to handle the reporting differently. TreasuryDirect sent me a 1099-OID, Fidelity lumped everything into their 1099-INT without clearly breaking out the accrued interest portion, and Schwab actually did provide a decent breakdown on their year-end statement. For anyone else juggling multiple brokers, I'd strongly recommend reaching out to each one's fixed income department (as Keisha mentioned) well before tax season. I waited until January to start sorting this out and it's been a nightmare trying to reconstruct all the transactions and ensure I'm not double-counting or missing anything. One specific question: if I received a 1099-OID from TreasuryDirect for bills I later transferred and sold through a broker, how do I make sure I'm not reporting the same interest income twice? The broker's 1099 seems to include some of the same time period that was covered by the OID reporting.