As savers, we are getting a higher risk-free rate of return. Treasury bills (T-bills), Treasury bonds and money market funds still pay interest rates in excess of 4% and carry no equity or credit risk. Because interest on Treasury bonds is exempt from state income taxes, these instruments are particularly attractive to high-income earners in high-tax states like California and New York.
In my taxable portfolio, I hold mostly Treasury bills (with maturities under one year), followed by a small amount of Treasury bills. I also keep a small amount of money in my Fidelity SPAXX Money Market Fund at all times. Since 1999, my goal has been to invest as much capital as possible in risky assets while keeping cash levels lean. Having next to no cash makes me feel like I’m living paycheck to paycheck, which helps maintain the discipline of not buying wasteful items.
In the past, when cash yields were less than 1%, it was easy to be without cash. But as my exposure to venture capital and venture debt funds increased, I needed to set aside more liquidity for capital needs. When a funding call goes out, I usually have a maximum of two weeks to raise the cash.
On the bright side, selling Treasuries to raise cash, whether to fund capital calls, pay property taxes, or buy dips in the stock market, is extremely easy and liquid. Given how liquid the Treasury market is, you don’t have to worry about holding a Treasury bond until maturity.
However, it wasn’t until I recently sold about $110,000 worth of U.S. Treasury bonds that I fully realized:
Selling a Treasury bond may trigger state taxable capital gains, although the interest is tax-free.
Selling Treasuries and Buying Stocks Is Easy
Ideally, you want to hold all Treasury securities to maturity to eliminate investment risk and minimize state income taxes. If you hold it to maturity, you will receive 100% of your principal plus stated interest. If you buy a Treasury bond at a discount, you will receive par value ($100) at maturity, locking in the yield you originally expected.
However, since my wife and I are both unemployed, we do not have the steady cash flow to meet our funding needs or purchase large amounts of stock each month. As a result, we are often forced to sell Treasury bills or bonds to fund investments while still staying within our overall asset allocation plan.
If you’re tempted to fire, be prepared for one frustrating downside: missing out on the opportunity to buy high-paying stocks during a bull market. When asset prices continue to move higher, sitting on the sidelines without new capital to deploy is never ideal.
Here are some Treasury bills I sold between November 17, 2025, and December 1, 2025, to purchase stocks, pay property taxes, and cover an unexpected $20,000 funding need for a closed-end venture capital fund.
Tax Implications When Selling Treasury Bonds
I hold several types of Treasury bonds in my taxable portfolio, so my initial instinct Here’s how it works: First, sell Treasury bonds with the closest maturity. Second, sell products with the lowest coupon rates. Finally, only sell positions that show capital gains. If Treasury bonds were in the red, I think I would simply hold them to maturity and lock in a guaranteed profit. I hate losing money, especially on risk-free assets.
This decision-making framework appears logical on the surface. But after thinking more deeply, I realized there are nuances to selling Treasury bonds, especially since Treasury bond interest is exempt from state income taxes, while capital gains are fully taxable.
In particular, it’s worth analyzing what happens when you sell your product zero coupon treasury bills with sale before it matures interest-paying treasury bills Early. Both situations have different tax treatments and potential disadvantages.
Below is an overview of the considerations and tax implications of the various types of Treasury bonds I sell.
A tax-saving guide to selling Treasury bonds before maturity
The biggest difference is: Interest on Treasury bonds is tax-free, but capital gains on early sales of Treasury bonds are fully taxable.
Knowing when to sell and what to sell can help you raise cash without giving up avoidable taxes.
zero coupon treasury bills
Zero-coupon notes are the cleanest structure: You buy at a discount and receive the face value at maturity. If you hold to maturity, the entire return is considered interest and remains exempt from California tax. This makes zero tax very efficient, if You don’t touch them.
However, selling early changes the tax treatment. The state-exempt interest becomes a state-taxable capital gain, erasing the main benefit of owning zero. They also fluctuate more than coupon notes of the same maturity because they are pure duration, so you may sell during the volatility and give up the yield you have locked in.
For most investors, a zero position is best viewed as a “hold to maturity” position. If you need liquidity, it’s usually better to sell other Treasury securities where you have smaller gains or losses first.
interest-paying treasury bills
Coupons and notes are more forgiving when selling early. Their interest remains tax-free, and price movements tend to be smaller, meaning any proceeds from an early sale are usually limited. This is useful when you need liquidity, want to move into riskier assets, or want to realize gains during lower income years.
The disadvantages are the same: Any capital gains are taxed by your state. If you happen to own a high-coupon bond that you purchased when interest rates were low, it may have embedded benefits that are costly to realize. Realize that as interest rates fall, Treasury bonds will appreciate in value. But short-term or near-coupon Treasury bonds often allow you to raise cash with minimal tax drag.
If you want to avoid state capital gains taxes, simply hold the coupon-paying Treasury bond to maturity. The interest and any price increases are considered interest income and are therefore exempt from state income taxes.
Longer-term Treasury bonds (5 years, 10 years, 20+ years)
Longer maturity Treasury bonds perform similarly to coupon Treasury bonds, but with greater interest rate sensitivity. If sold early, they can generate meaningful gains or losses. This volatility can actually be useful: Taking losses on Treasury bonds is tax efficient because those losses can offset gains elsewhere while avoiding state taxes entirely.
If you are looking for liquidity and you have long-term notes that are trading at a loss, these positions are often the most tax-efficient to sell. The opposite is also true: Notes with larger yields generally should not be sold unless liquidity needs outweigh tax costs.
How to Prioritize Sales (Tax Savings Ranking)
When deciding what to sell for tax minimization purposes, the hierarchy of tax savings for high state tax residents is as follows:
- Treasury bonds are in the red – The cleanest, most tax-efficient source of liquidity.
- Treasury bonds with the smallest yield – Raise cash without much tax cost.
- interest-bearing Treasury bonds before zero-coupon notes – Because selling zero converts state-exempt interest into taxable gain.
- Avoid selling zero-coupon notes and high-yield positions Unless necessary.
This sales hierarchy minimizes taxes, but sometimes paying taxes is still the right move, as I ultimately decided in my own case.
When sold early Do meaningful
Despite the tax considerations, there are certain situations where selling sooner is a better option:
- You are in a low-income or low-tax year.
- You are reinvesting in opportunities with better expected returns.
- The position suffered a loss or only a small gain.
- You need to rebalance duration or risk.
- You expect interest rates to rise, causing Treasury bond prices to fall
My purpose in selling treasury bills is hope Better return on investment
As the family’s money manager, one of my goals is to exceed the historical returns of our target asset allocation. For example, if our long-term portfolio is 60/40, the base annual return is approximately 8.4%. To overcome this, I occasionally need to make aggressive investment decisions, some of which will work and others of which won’t.
These decisions and the responsibilities behind them can sometimes make managing our family finances feel like a full-time job. Unfortunately, the more money you manage for your family, the greater the stress due to the greater the potential absolute losses. This is a topic I will discuss further in relation to what happens after a year of managing a relative’s money.
Ultimately, after the S&P 500 pulled back about 6% in November, several tech companies I followed were down 10%–20%, and Bitcoin was down about 30% from its peak, I decided to sell about $110,000 in Treasury bills before expiration.
pay capital gains tax, most$4,400 in interest income feels like a reasonable price to buy into these opportunities. If the same $110,000 were parked in a 4% money market fund, the tax hit would be similar to what I would owe. In fact, my capital gain was less than $2,000.
Some purchases made with Treasury bill proceeds
I want to buy Tesla at under $400 because I have owned Tesla stock since 2018 and still believe in its long-term potential in robotics and self-driving cars.
I also bought Nvidia after the sell-off on earnings day. The stock initially rose a few percentage points before reversing. I think concerns about Google relying on TPUs instead of Nvidia chips are overblown, as industry demand still far outstrips supply.
I also added to my holdings in Microsoft after the stock fell about 13% from its peak. It’s a safer way to play AI, similar to Google, which also generates huge free cash flow. I have owned shares of large technology companies for decades and plan to continue buying them. Meanwhile, I’m building a new $500,000 private AI company position by: Fengsheng Venture Capital.
Finally, when Bitcoin reached $85,000, I bought Bitcoin on the dip through the IBIT ETF. After the massive liquidation event in October, and with pro-crypto governments in place, I think the 30% sell-off is a good entry point.
Only time will tell whether the returns on these investments will exceed the one-year guaranteed return of about 4% on Treasury bonds. Luckily, I still have more Treasury debt.
Maximize financial efficiency without missing opportunities
Treasuries provide good liquidity, but tax treatment is important. To maintain efficiency, hold zero-coupon notes to maturity, sell losing positions first, and use Treasury bonds with the smallest yield to meet daily liquidity needs. Substantial embedded gains and zero-coupon notes should be sold only if the proceeds exceed state tax costs.
That said, if you see an investment opportunity that might be better than U.S. Treasuries, you might want to sell some and reinvest. After all, having liquidity to buy dips is one of the main reasons you own Treasuries.
Readers, are you aware of the tax implications of selling a Treasury bond before maturity? How do you use and view your Treasury holdings?
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