Description

• Negotiable Treasury securities fall into three main categories: Treasury bonds, notes and T-bills. The T-bill is a short-term security that the Treasury Department issues with maturities of 13, 26 and 52 weeks. When the bonds mature, you redeem them. Financial institutions mainly purchase T-bills, but you may purchase them through a broker or by opening an account with the TreasuryDirect website.
  
  

Interest

• The Treasury Department sells T-bills at auction with the purchase price set at a discount off the face value. The discount is in increments of $100. For example, you might buy a 52-week $10,000 T-bill for 9,700. When you redeem the T-bill at maturity, you receive the face value. The difference is the interest you earn. In this example, the interest is $300, which works out to a 3.09 percent annual yield on the money you invested.
  
  

Secondary Market

• As T-bills are negotiable securities, they trade on the secondary bond market. If you purchase a T-bill on the secondary market and hold it until maturity, it is possible to realize a capital gain or loss, as the market price may be different from the issue price of the bond. For example, you may buy a 52-week T-bill with an issue price of $9,700 and a face value of $10,000 on the secondary market 26 weeks before it matures for $9,800. You will get $10,000 when you redeem the bond is redeemed -- an increase of $200. As half of the T-bill's lifespan elapsed before you purchased it, your interest earnings are $150 with the remaining $50 as a capital gain.
  
  

Tax Consequences

• T-bills are not subject to state or local taxes. However, you do have to pay federal income taxes on interest earnings and on any capital gains you realize. The Internal Revenue Service considers the interest on a T-bill as ordinary income and taxes it at the same rates as other earned income, such as wages. Any capital gain you realize is taxable as such. However, a capital gain on a T-bill will always be a short-term capital gain as the longest maturity, 52 weeks, is less than the holding time required to qualify for long-term capital gains tax rates.