How to deal with tips (Treasury Inflation Protected Securities)

Greeting all. how does one deal with tips(Treasury Inflation Protected Securities) I know I pay taxes on the interest payments but do i pay the principal increase when? when the bond is due? or each year it increases? for info here more info on tips: unlike a traditional government bond, the principal and interest payments on TIPS adjust to track changes in inflation. Specifically, the principal and interest on TIPS are indexed to the CPI-All Urban Consumers (CPI-U) so that increases in consumer prices are directly translated into higher principal and interest payments on TIPS. For example, consider a $1,000 ten-year TIPS note with a 2.5% coupon in an environment of 4% annual inflation. Initially, the interest paid would be 2.5% of $1,000, or $25.00. But the principal on the TIPS note will adjust upward on a daily basis to match the inflation rate, reaching $1,480 (4% per year, compounded annually) at the end of 10 years. Although the coupon rate on the TIPS note will remain fixed at

2.5%, the actual interest payments will also rise as the value of the principal increases; in the tenth year, the annualized interest payment will be 2.5% of the inflation-adjusted principal, or 2.5% of $1,480, which is $37.00. At maturity, the investor who purchased the TIPS note when it was issued for $1,000 will receive the inflation- adjusted principal of $1,480.

thanks all marcus cornelius felix/wuffa/william wheeler

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wuffa
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You pay federal income taxes on both interest received and principal accrued annually.

Dick

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Dick Adams

What happens if the principal decreases? If I read the mentioned document correctly, you cannot deduct the loss (capital loss)? Seems strange. If you pay tax on the principal, is it capital gain, and if so then long term or short term, and does it add to your cost basis?

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so the interest is just income and the principal is what? income or cap gains and if cap gains not long term? even on a 20 year bond? wheeler

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wuffa

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