J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

4.27 Treasury Bills, Notes, and Bonds

Interest on securities issued by the federal government is fully taxable on your federal return. However, interest on federal obligations is not subject to state or local income taxes. Interest on Treasury bills, notes, and bonds is reported on Form 1099-INT.

Treasury bonds and notes.

Treasury notes have maturities of two, three, five, seven or 10 years. Treasury bonds have maturities of 30 years. Interest on notes and bonds is paid every six months and is taxable when received on your federal return. Treasury bonds and notes are capital assets; gain or loss on their sale, exchange, or redemption is reported as capital gain or loss on Schedule D (Chapter 5). If you purchased a federal obligation below par (at a discount) after July 1, 1982, see 4.19 for the rules on reporting original issue discount. If you purchased a Treasury bond or note above par (at a premium), you may elect to amortize the premium (4.17). If you do not elect to amortize and you hold the bond or note to maturity, you have a capital loss.

Treasury inflation-protected securities (TIPS).

These pay interest semiannually at a fixed rate on a principal amount that is adjusted to take into account inflation or deflation. The interest is taxable when received and any increase in the inflation-adjusted principal amount while you hold the bond must be reported as original issue discount (OID) (4.19). Your basis in the bond is increased by the OID included in income. On a sale or ...