Rnam this is late but maybe you have not filed your taxes yet.

You wrote:


""I have this year bought a few 3-6 month zero-coupon T Bills""

Short term T-bills are zero-coupon. I would imagine if you sold a short-term t-bill before maturity, it would be at a loss...unless things got really weird with interest rates.

And you typed:

""if I sell the security before maturity is the gain reported as OID or capital gain? And if it is reported as capital gain, will it still be exempt from state taxes.""

When you sell a bond before it matures, you should get the paperwork for the transaction as to how much is accrued interest (OID), and the balance being how much you were paid for the bond. If that amount is more than what you paid for the bond, you have a capital gain. You would probably have to pay state tax on that amount, but call your state tax board for the final answer. If less, you have a capital loss to report.

If you sell or redeem a zero-coupon bond that you have had for multiple years, you may have to go back through your paper work, which should have been sent to you over the years, subtract out the OID interest you have reported, and figure the difference to see if you have a capital gain or loss.

We sold a house around 1980 or so, and I was lucky enough to put all of the receipt into long-term US treasury zero-coupon bonds. At that time interest rates on the 30-year bond were 18% or so. So we bot these at a big discount. Paul Volcker ran the federal reserve board and was able to cut that interest rate in half over the next 3 or 4 years. We were then going to buy a house, so I sold the bonds and had to subtract out the OID that we reported ever year, to compute how much our capital gain was. Today Treasury Direct or your broker will probably be doing that for you.