General Rules

• Interest received from U.S. treasuries is generally reported on your tax return as ordinary income. If you sell a treasury bond for more than you paid for it, you will pay capital gains tax on the transaction, unless you hold the bond in a tax-advantaged account such as an IRA or Section 529 plan. The capital gains tax that applies depends on how long you held the bond. If you held the bond for less than a year, you will pay the short-term capital gains tax, which is generally the same as your marginal income tax bracket. If you held the bond longer than a year, you will pay the lower long-term capital gains tax. If you sell the bond at a loss, you can deduct the loss against any capital gains you have realized for the year. If you have losses left over, you can deduct them against up to $3,000 of income. You can carry forward unused capital losses to write them off against capital gains and up to $3,000 in income in future years.
  
  

Exemption from State Taxation

• Just as the federal government does not tax income from municipal bonds, states cannot tax income from federal debt. This makes treasury bonds, bills and notes particularly attractive to residents in states that have high income taxes.
  
  

Zero Coupon Bonds

• The federal government occasionally issues a special type of bond called a "zero coupon," or a "zero." These bonds don't pay a regular periodic interest payment. Instead, investors purchase them at a steep discount to their face value. The bonds mature a number of years later and the government pays the full face value of the bond in one lump sum. However, the owner of the bond is still liable for tax on the imputed income, or the income the bond would be paying if it were not a zero coupon.
  
  

Taxation of Savings Bonds

• The U.S. treasury also issues savings bond debt, chiefly in two varieties -- Series EE bonds and Series I bonds. Series EE bonds pay monthly interest payments, but bond-holders can choose to defer taxation until the bond stops paying interest after 30 years. Series I bonds also pay interest payments that vary with the rate of inflation. However, they also allow investors to defer taxation on this income until the bond ceases paying interest after 30 years.