Those who held US Treasury Inflation Protected Securities (TIPS) during all of 2009 saw their face value drop between Dec 31, 2008 and Dec 31, 2009.
Since an increase is value is taxable income (reported on a 1099-OID), how do I subtract the loss in value for 2009?
loss, you would report it as a capital loss, but if you kept them, you do not report either an increase or a decrease.
That is the usual case, but not the case with TIPS:
Like I-Bonds, TIPS are guaranteed by the U.S. government and are exempt from state and local tax. Unlike I-Bonds, you'll have to pay tax on distributions. Uncle Sam is going to tax you at ordinary income rates for the semiannual interest payments you receive, as well as on the "phantom income" you receive as your underlying principal adjusts for inflation. You won't actually get this inflated principal until the bond is redeemed, but you'll be paying tax on the adjustments annually. If that tax is significant, you could find yourself in a negative cash flow situation--more is going out in tax payments than is coming in through interest payments. (from
Your answer is incorrect. The increase in value of TIPS (based on the issue price) is taxable interest income and is reported to the IRS for bonds in street name by a 1099-OID. So if a person bought $10,000 of a TIPS on the day it was issued, and it was worth $18,000 at maturity years later, the capital gain in the year of maturity is ZERO because the $8000 growth over the years was taxed as interest income each year.
My question still remains unanswered. Between Dec 31, 2008 and Dec
31, 2009, the face value of all TIPS declined (the CPI-U for Oct, 2008, on which the December price of TIPS are based was 216.573, while for Oct, 2009, it was 216.177), so how do we show the loss of interest income on our 1040's?
This is what I found, which seems like it might apply:
from the IRS
Net positive adjustment. A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Treat a net positive adjustment as additional OID for the tax year.
Net negative adjustment. A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Use a net negative adjustment to offset OID on the debt instrument for the tax year. If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year.
Basis adjustments. In general, increase your basis in a contingent payment debt instrument by the OID included in income. Your basis, however, is not affected by any negative or positive adjustments. Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received.
The foregoing is a good reason to have TIPS in retirement accounts.
==>>> Your answer is incorrect. The increase in value of TIPS (based on the
===The above answer was NOT incorrect, but it was incomplete. If you sell them for an amount above or below your basis, you would have a capital gain or loss. However there could be an original issue discount which should be amortized, and that would reduce your basis, but not necessarily to the point that it would eliminate any capital gain. It could actually result in increasing your capital loss.
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