As savers, Treasury bills (T-bills), Treasury bonds, and money market funds continue to offer over 4% yields without equity or credit risk. These instruments are particularly attractive for high earners in states like California and New York, as Treasury interest is exempt from state income tax.
In my taxable portfolio, I hold mostly short-term Treasury bills, a handful of Treasury bonds, and a small portion in the Fidelity SPAXX money market fund. Maintaining minimal cash keeps me disciplined, avoiding unnecessary spending while preparing for venture capital or debt capital calls.
Selling Treasury Bonds for Cash
Treasuries are highly liquid, making it easy to sell them to fund capital calls, pay property taxes, or invest in stocks. However, selling Treasury bonds can trigger state-taxable capital gains, even though interest remains exempt from state income tax.
Holding Treasuries to maturity minimizes state taxes, as you receive your principal plus interest, and zero-coupon Treasuries return par value at maturity. But for investors like my wife and me, sometimes selling early is necessary to deploy cash into high-return opportunities.
Tax Implications of Selling Treasuries
Zero-Coupon Treasury Bills:
Holding to maturity is ideal because interest is exempt from state tax. Selling early converts tax-exempt interest into taxable capital gains and can result in losses if sold during volatile periods.
Coupon-Paying Treasuries:
Interest remains state-tax-exempt even if sold early. Price fluctuations are smaller, so gains are modest, making them useful for liquidity needs with minimal tax drag.
Longer-Dated Treasuries (5–20+ years):
These can generate meaningful gains or losses when sold early. Loss harvesting is tax-efficient, offsetting gains elsewhere. Selling positions with embedded gains should be carefully evaluated against liquidity needs.
Tax-Efficient Selling Hierarchy
- Treasuries with losses – most tax-efficient.
- Treasuries with minimal gains – raise cash without significant tax cost.
- Coupon-paying Treasuries before zero-coupon bills – selling zeros creates taxable gains.
- Avoid selling zero-coupon or high-gain positions unless necessary.
When Selling Early Makes Sense
- During low-income or low-tax years.
- Reinvesting into higher-return opportunities.
- Rebalancing risk or duration.
- Anticipating rising interest rates that lower Treasury prices.
Using Treasury Sales for Investment Opportunities
I sold ~$110,000 in Treasuries to invest in stocks and private AI ventures. Purchases included Tesla, Nvidia, Microsoft, and Bitcoin during market pullbacks, using dollar-cost averaging to manage timing risks.
Maximizing Treasury Efficiency
Treasuries provide liquidity and safety, but tax-efficient management is key:
- Hold zero-coupon bills to maturity.
- Sell loss positions first.
- Use coupon Treasuries with small gains for routine liquidity.
- Large gains or zero-coupon bills should only be sold if benefits outweigh state-tax costs.
Treasuries allow investors to have cash ready for market dips while minimizing tax exposure. Understanding tax rules ensures you maximize returns while maintaining flexibility.
