Understanding Treasury Bill ETF taxation for SGOV and similar investments

14 The tax treatment for Treasury Bill ETFs like SGOV can definitely be confusing! Let me break it down for you: 1) Federal Income Tax: The interest income generated by the Treasury bills within the ETF is subject to federal income tax. This is reported to you on Form 1099-DIV as ordinary dividends. 2) State/Local Tax Exemption: You're correct that the interest income from Treasury bills is generally exempt from state and local taxes. The ETF should provide documentation showing what portion of your distributions is exempt. 3) Capital Gains Tax: If you sell your ETF shares for more than you paid, you'll owe capital gains tax on that profit. This is separate from the tax treatment of the interest income. Short-term gains (held less than a year) are taxed at your ordinary income rate, while long-term gains get preferential tax rates. 4) Dividend Distributions: For ETFs like SGOV, the distributions you receive are primarily from the interest earned on the underlying Treasury bills. These distributions are considered ordinary income for federal tax purposes, not qualified dividends. Hope this helps clarify things!

7 I've been wrestling with similar tax questions about Treasury ETFs and stumbled upon taxr.ai (https://taxr.ai) which really helped me make sense of my own situation. I uploaded my 1099 forms and it pointed out that my broker had actually miscategorized some of my Treasury ETF income! It showed exactly which portions were exempt from state taxes and which weren't. The tool even gave me personalized guidance about how Treasury bill ETFs distribute income (mostly as non-qualified dividends) and how that differs from direct Treasury ownership. For someone confused about ETF taxation like I was, it was super helpful to get an analysis specific to my situation rather than just general advice.

12 I was initially skeptical about taxr.ai but decided to try it after getting frustrated with contradictory advice about my Treasury ETFs. The analysis it provided was actually really impressive - it identified exactly which portions of my ETF distributions were exempt from state taxes and explained why some capital gains were still taxable even though the underlying assets were Treasuries. What impressed me most was how it explained the differences between direct Treasury ownership versus ETF ownership from a tax perspective. Saved me from making a costly mistake on my return! I'm usually wary of tax tools but this one actually delivered useful, specific guidance beyond the general advice you find online.

11 After hours of waiting on hold with the IRS trying to get clarity on Treasury ETF taxation (seriously, it was ridiculous), I finally discovered Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to confirm exactly how Treasury interest maintains its state tax exemption when distributed through an ETF structure like SGOV. I was also able to ask specific questions about reporting requirements for these distributions on my tax return. Completely worth it after the frustration of trying to get through on my own for days.

22 I feel like I need to eat some crow here. After posting my skeptical comment, I was still wrestling with questions about my SGOV and TBIL holdings, so I decided to try Claimyr as a last resort. Within 15 minutes, I was talking to an actual IRS agent who specialized in investment taxation! The agent clarified that while the interest from Treasury bills in ETFs like SGOV does maintain its state/local tax exemption, I still needed to report it properly on my federal return. She also explained how to read the supplemental tax statement from my ETF provider to identify which distributions were Treasury interest versus other income types. Saved me a ton of confusion and potentially an audit flag. Sometimes being proven wrong is actually helpful!

17 One thing that hasn't been mentioned yet - if you're holding Treasury ETFs in a taxable account, you should check if your state has a specific form for claiming the exemption for Treasury interest. Here in California, we have to file a schedule to specifically claim the exemption for interest from U.S. obligations that passes through ETFs and mutual funds.

5 Does anyone know if there's a minimum percentage of Treasuries that an ETF needs to hold for the distributions to be state tax exempt? I have both SGOV (which is almost entirely Treasuries) and another ETF that's only about 60% Treasuries with the rest in agency bonds and cash.

Just wanted to add another important consideration - make sure you're keeping good records of your cost basis for SGOV shares, especially if you're reinvesting distributions. Each reinvestment creates a new tax lot with its own purchase date and cost basis. I use my broker's average cost method for simplicity, but you can also track specific lots if you want more control over which shares you're selling (for tax loss harvesting purposes). The IRS requires you to report your cost basis when you sell, so don't rely solely on your broker's records - keep your own backup documentation. Also, if you're planning to hold Treasury ETFs long-term, consider whether a target-date Treasury ladder might make more sense than an ETF. With individual Treasury bills, you get the same state tax exemption but avoid the ongoing expense ratio of the ETF.

Great point about record keeping! I learned this the hard way when I tried to calculate my gains on SGOV last year. One thing I'd add - if you're comparing Treasury ETFs to individual Treasury bills, also consider the convenience factor. With ETFs like SGOV, you get automatic reinvestment and don't have to worry about laddering maturities yourself. The expense ratio on SGOV is only about 0.09%, which might be worth it for the simplicity. That said, if you're investing large amounts (like $100k+), buying individual Treasury bills through TreasuryDirect might make more sense since you avoid the expense ratio entirely and still get the same state tax exemption. Just depends on your situation and how hands-on you want to be with managing maturities.

This is such a helpful thread! I'm in a similar situation with SGOV and have been confused about the tax implications. One additional thing I'd mention for newcomers like us - don't forget that even though Treasury interest is exempt from state taxes, you still need to report it on your federal return as taxable income. I made the mistake of thinking "exempt" meant I didn't have to report it at all and almost missed including it entirely. Also, if you're using tax software like TurboTax or FreeTaxUSA, make sure it's properly categorizing your ETF distributions. I had to manually override mine last year because the software initially treated all my SGOV distributions as regular dividends without recognizing the state tax exemption portion. The learning curve is definitely steep for Treasury ETF taxation, but threads like this make it much clearer. Thanks everyone for sharing your experiences!