Treasury Bills are by definition issued for 12 months or less and always discounted with zero coupon, and called out specifically as short term obligations in IRS Pub 550 and the discount is treated as interest income, reported at maturity. Pub 550 also states that "Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year."
Treasury "Notes and Bonds" have maturities when issued of at least 1 year but can have both coupon component and the discount component which is just treated like any other bond, and Pub 550 makes no distinction when it talks about "market discount bonds" between corporates, munis, treasuries - but does exclude "Short-term obligations" i.e. T-Bills. The coupon interest is reported on 1099-INT and the 'accrued market discount' (AMD) is reported on 1099-B Box 1f at maturity, which is reported as interest income not a cap gain (see Pub 550 section on Market Discount Bonds).
Pub 500 is a good resource for all things investment income related
https://www.irs.gov/pub/irs-pdf/p550.pdf
The problem with low coupon notes is a larger part of the total yield is coming from the AMD component, which falls into this debate on state tax exemption. The general argument made on the internets is that this AMD is really being paid by participants on the secondary market and not directly by the US Treasury so is it a "US Government Obligation"; and plenty of arguments to the contrary based on how a particular state tax code is actually written which usually doesn't make any distinction about secondary markets, and depends on definitions/interpretation of "interest" vs. "income derived from" etc. Some states e.g. NJ exempt gains on Treasuries as well as interest which really implies AMD is exempt also; meanwhile NC ruled in courts explicitly that the AMD is taxable in that state. So it depends on your state and interpretation of the tax code whether AMD is exempt, and if its significant for your situation you may need to seek CPA advice expert in your state. TT doesn't support it either way, there is nowhere to designate AMD as coming from a US Gov Obligation, the general solution if seeking exemption has been to make a miscellaneous adjustment on state taxes of some sort. This thread below has more info a bunch of links to other threads on this topic. Personally I started avoiding low coupon Notes when this issue came to light just to avoid the hassle of the ambiguity/adjustment, as you can usually find higher coupon notes at equivalent yields trading close to par or ideally at a premium, which is then simply contained to a premium adjustment on the 1099-INT and the 1099-B will just show proceeds = cost and zero AMD/gain.
https://ttlc.intuit.com/community/state-taxes/discussion/re-accrued-market-discount-on-us-treasuries...
I'm not a CPA/expert so just providing context on these issues as I know it, please research accordingly. Hope this helps.
