How to Report U.S. Treasury Inflation-Protected Securities (TIPS) on a Tax Return
U.S. Treasury Inflation-Protected Securities (TIPS) adjust their principal value based on changes in the Consumer Price Index (CPI). These adjustments create several unique tax reporting items that may appear on a client’s Form 1099 package from Schwab.
Since Crosswalk purchases individual TIPS securities (not TIPS funds), clients may receive the following tax forms:
- Form 1099-INT
- Form 1099-OID
- Form 1099-B
This article provides an overview of how these items are typically reported under IRS rules.
This article is for educational purposes only and is not tax advice.
Clients should consult a qualified tax professional regarding their individual circumstances.
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- Phantom Income (Inflation Adjustments) – Form 1099-OID
Each year, the principal value of a TIPS increases or decreases based on CPI. When CPI increases, the principal amount rises and the IRS treats this increase as taxable interest income, even though no cash is received. This income is often described as “phantom income.”
Where It Appears
- Schwab reports this amount on Form 1099-OID (Original Issue Discount), Box 1.
- Tax preparers generally include this on Schedule B → Form 1040 (Interest Income).
IRS References
- IRS Publication 1212 – Guide to Original Issue Discount (OID) Instruments
- Treasury Regulation §1.1275-7 (Inflation-indexed debt instruments, including TIPS)
Federal vs. State Tax
- Taxable federally
- Exempt from state and local income tax
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- Deflation and Negative OID
In years when CPI decreases, TIPS principal may fall, creating negative OID.
IRS Rules
- Negative OID may be reported, but only to offset prior positive OID from the same bond.
- Negative OID cannot create a net deduction for the tax year.
- Excess deflation not used to offset prior OID reduces the bond’s adjusted cost basis instead.
Schwab Reporting
- Schwab reports negative OID only up to the amount of prior increases.
- Any additional deflation is reflected as a basis reduction, not as deductible income.
IRS References
- Publication 1212 – Sections on Inflation-Indexed Debt Instruments
- Reg. §1.1275-7(d) – Treatment of inflation and deflation adjustments
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- Semiannual Coupon Interest – Form 1099-INT
TIPS pay coupon interest twice a year.
This interest is separate from the inflation adjustment.
Where It Appears
- Coupon interest is reported on Form 1099-INT.
Tax Treatment
- Taxable federally
- Not taxed by states or localities (per 31 U.S.C. §3124)
IRS Reference
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- Adjusted Cost Basis (Inflation and Deflation Effects)
Over the life of a TIPS:
- Positive OID (inflation) increases adjusted basis.
- Negative OID (deflation) reduces adjusted basis.
These adjustments ensure the investor is not taxed twice on the same inflation accretion and that capital gain/loss at disposition is calculated correctly.
IRS Reference
- IRS Publication 550 – Investment Income and Expenses
(See “Inflation-Indexed Debt Instruments”)
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- Sales or Maturity – Form 1099-B
When a TIPS matures or is sold, Schwab issues a Form 1099-B showing:
- Proceeds
- Adjusted cost basis (for covered securities)
- Capital gain or loss
Covered vs. Non-Covered Securities
- TIPS purchased in 2016 or later are typically covered securities.
- Schwab must report adjusted basis to both the client and the IRS.
- Pre-2016 TIPS are non-covered, meaning:
- Schwab may track basis
- The taxpayer must verify accuracy
IRS References
- Instructions for Form 1099-B
- IRS Cost Basis Reporting Regulations (covered securities)
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- Summary Table
Item | Schwab Form | How Reported | Federal Tax | State/Local |
Inflation adjustment (phantom income) | 1099-OID, Box 1 | Schedule B → Form 1040 | Yes | No |
Negative OID (deflation to prior OID) | 1099-OID | Reduces taxable interest | Yes, limited | No |
Excess deflation | Basis adjustment only | Not deductible | No | No |
Cash coupon interest | 1099-INT | Schedule B → Form 1040 | Yes | No |
Sale/maturity gain or loss | 1099-B | Form 8949 / Schedule D | Yes | Varies |
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- Crosswalk Support for Tax Professionals
With client permission, Crosswalk Investment Advisory can provide:
- TIPS purchase and maturity dates
- Inflation-adjusted principal values
- Clarification of 1099-INT, 1099-OID, or 1099-B entries
- Assistance with basis calculations
- Direct coordination with tax preparers when needed
Our goal is to ensure tax professionals have the information necessary to accurately report TIPS activity.
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Important Disclosures
Crosswalk Investment Advisory, Inc. is a Registered Investment Adviser. Registration does not imply a certain level of skill or training. Advisory services are offered only to clients or prospective clients where Crosswalk Investment Advisory, Inc. and its representatives are properly licensed or exempt from licensure.
This article is for informational and educational purposes only and does not constitute tax, legal, or accounting advice. Clients should consult a qualified tax professional regarding their personal tax situation. Nothing in this article should be interpreted as a recommendation to buy or sell any security or to adopt any specific investment strategy.
All investments involve risk, including possible loss of principal. Inflation-indexed securities may fluctuate based on interest rates, real yields, inflation expectations, and market conditions. Past performance does not guarantee future results.
Custody and brokerage services are provided by Charles Schwab & Co., Inc. (“Schwab”), member SIPC.
For additional information about Crosswalk Investment Advisory, Inc. please refer to our Form ADV, available upon request.