Taxes and Your Investment Returns
Interest on U.S. Treasury obligations. Interest on securities issued by the federal government is fully taxable on your federal income tax return in the year that it’s received. It is not subject to state or local taxes, however. On a Treasury bill held to maturity or disposed of prior to that time, you report as interest the difference between the discounted price you paid and the amount you receive upon redemption or sale.
Interest on state and local government obligations. Generally, you pay no federal tax on the interest on bonds or notes of states, cities, counties, the District of Columbia, or possessions of the United States.
Capital gains and losses. Net capital gains (capital gains less capital losses) are added to your other income and are subject to capital gains tax rates. Capital losses are deductible from capital gains and are deductible from as much as $3,000 of your ordinary income, with a carryover to subsequent years of losses in excess of $3,000.
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