Because T-Bills are issued at a discount and do not pay a traditional coupon, your "accrued interest" is calculated using a straight-line (ratable) appreciation method from your purchase date to the maturity date.
Example Scenario:
Purchase Price: $99.72 (with 28 days remaining to maturity)
Total Discount to Par ($100): $0.28
Daily Accrual Rate: $0.01 per day ($0.28 ÷ 28 days)
If you sell this T-Bill 5 days after purchase at a market price of $99.78 (with 23 days left to maturity), your total realized gain of $0.06 is broken down into two distinct categories for your taxes:
Component | Amount | How it's Calculated | Tax Treatment |
Accrued Interest | $0.05 | 5 days of holding × $0.01 per day | Taxed as ordinary income; exempt from state and local taxes. |
Capital Gains | $0.01 | Sale price ($99.78) minus your adjusted basis ($99.77) | Taxed as a short-term capital gain; subject to state and local taxes. |
Total Realized Gain | $0.06 | Accrued Interest ($0.05) + Capital Gain ($0.01) |
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Why this matters: Your cost basis increases by a penny every day you hold the bill. When liquidating early, any profit matching that daily straight-line growth is treated as federal interest income, while any market fluctuations above or below that path result in a capital gain or loss.
Please note that this example is for illustrative purposes only, and actual results may vary.