State tax implications of selling a Treasury Bill prior to maturity.

[tomchealy]

If I sell a US treasury bill prior to its maturity, does this trigger a capital gain that is taxable at both the federal and state level?  I know that if the t-bill is held until maturity, and redeemed for its face value, the gain would be treated as interest that is free from state/local taxes.  Does selling the t-bill prior to its maturity result in my forfeiting the exemption from state/local taxes on any gains?

TurboTax appears to only be adjusting my income/taxes for income earned on treasury bills if they were held fully until maturity.  On any treasury bills sold prior to maturity that resulted in gains, TurboTax appears to be treating these as regular capital gains that are taxed at both federal/state levels.

[ThomasM125]

When you sell a treasury bill you may have capital gain or loss in addition to interest earned on the note during the time that you owned it. The capital gain portion of the sale proceeds is taxed for federal and state tax purposes. Only the interest earned is exempt fom state income tax.

[hbl3973]

As ThomasM125 points out, you are mistaken that a T-Bill sold at maturity gives a capital gain that is free from state tax.  The "gain" is treated as US government interest which is, of course, exempt from state tax.  You may have a capital loss to report if you bought the T-Bill through a broker rather than directly via Treasury Direct as you basis is the original cost plus the interest earned.  (The site https://ibkrcampus.com/trading-lessons/capital-gains-or-losses-for-bonds/ notes that the redemption is reported as a capital gain, whether zero or not.)

Of course, your question focused on selling before maturity.  In the rather unlikely event that you aren't given the interest earned on a 1099-INT form, you can use the proportion of the maturity period you held the T-Bill and multiply it by the interest the bill earned until maturity, i.e. the maturity value minus the original issue price.  (Note this does not work with stripped Treasuries and most zero-coupon bonds which are required to use a compounding interest calculation.)