Buying Treasury Bills on secondary market. How is this treated in CA?

[Araewood]

I bought treasury bills on the secondary market for a discount. I know for federal taxes this is interest income. On the state taxes in CA, is the entire discount say $2,000 tax exempt or do I have to only take the % of this discount based on the days I owned the bill divided by the total days of this bill from issue date to maturity? 

[baldietax]

I don't know about CA tax peculiarities, but the general logic you would only be able to exclude % of the discount for the time you owned it divided by the entire maturity of the bill doesn't make sense to me.  When you buy it on the secondary market your discount is already taking into account days remaining to maturity.  e.g. if a bill is issued at 98 for 6 months and you buy it with 3 months remaining, the price will be around 99 +/- any significant shift in short term rates.

Some brokers report T-Bills differently but the simplest reporting is just 1099-INT Box 3 for $2000 for example in your case, with no 1099-B.  I'm not aware of any distinction between that interest and coupon interest on a T-Note for example.

Discounts reported on 1099-B with AMD in Box 1f (e.g. Treasury Note) is a more complicated issue as they are not designated as Treasuries in TT when that income is adjusted onto Schedule B as ordinary income, and don't flow thru for state exemption, and there are various ambiguities and debates on the internets about exemption of that interest depending on individual state tax codes; but if you don't have that situation then you should be fine (avoid low coupon discount Treasury Notes or you could encounter this issue).

[Araewood]

 I am sure that I overpaid the state because my discount when I purchased the Treasury Bill is based on the months or years remaining. I should not have adjusted & lower my discount. I used the interest adjustment form for my state changes. I did buy a few low interest Treasury Bills. Why are they treated differently? I will amend my state tax return. 

Thank you for the help!

[baldietax]

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.