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Types of Bonds

General Tax Treatment

Federal tax.

The semiannual interest payments on TIPS are taxable to a holder of securities when received. This is consistent with the tax treatment of other Treasury securities. If the holder is a corporation or other institutional investor, the interest payments will be taxable when received or accrued, in accordance with the holders’ method of accounting.

Investors will also be taxed on inflation adjustments to the principal in the year in which the adjustments occur, even though the principal adjustments would not actually be received from Treasury until maturity (a situation that is sometimes described as taxing “phantom income”). Conversely, a decrease in the inflation-indexed principal amount (due to deflation) will first reduce the interest income attributable to the semiannual interest payments for the year of the adjustment; and if the amount of the decrease exceeds the income attributable to the semiannual interest payments, the excess will generally be an ordinary deduction to the extent that interest from the security was previously included in income. Any remaining decrease will be carried forward to reduce interest income on the inflation-protected security in future years. A taxpayer will generally recognize a capital loss if the taxpayer sells or exchanges the inflation-protected security, or if the security matures, before the taxpayer has used all that decrease.

If a Treasury Inflation Protected Security is purchased at a discount you should consult your tax advisor.

State tax.

Like all securities issued by the U.S. Treasury, TIPS are exempt from taxation by a state or a political subdivision of a state, except for state estate or inheritance taxes and other exceptions provided by law.

Consult your tax adviser for advice appropriate to your particular circumstance.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.