Federal Taxation of Treasury Bond Interest At the federal level, the interest generated by treasury bonds is exclusively subject to income tax by the Internal Revenue Service (IRS). Conversely, selling at a higher price than your purchase basis results in a capital gain, while selling lower results in a capital loss.
How Purchase Price Shapes Your Treasury Bond Taxes
For example, if you buy a bond for $9,500 that will pay $10,000 at maturity, the $500 difference is taxable as interest income annually, even though you do not receive the cash until the bond matures. This means you pay federal tax on the "phantom" inflation adjustment even though the cash value of the bond has not been liquidated.
Distinguishing Between Purchase Price and Sale Proceeds Tax complexity arises when you sell a treasury bond before it matures, rather than holding it to the end date. If you purchased the bond at a discount—such as a zero-coupon bond or a T-bill bought below face value—the difference between your purchase price and your sale price is considered a capital gain.
How Purchase Price Affects Your Treasury Bond Taxes
Inflation-Protected Securities (TIPS) Treasury Inflation-Protected Securities introduce a unique tax wrinkle due to their structure. These gains or losses are subject to capital gains tax rates, which are generally more favorable than ordinary income rates, provided the bond was held for more than one year.
More About Treasury bond taxes
Looking at Treasury bond taxes from another angle can help expand the discussion and give readers a second clear paragraph under the same section.
More perspective on Treasury bond taxes can make the topic easier to follow by connecting earlier points with a few simple takeaways.
