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Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation.
Federal Income Tax Treatment: The interest payments from these securities are taxed for federal income tax purposes in the year you receive the payments (payments are semi-annual - every six months) as you would expect. The inflation adjustment credited to the bonds is also taxable each year as you might not expect. The acual tax treatment is a complicated issue. It would be prudent to have a discussion with your tax advisor prior to purchasing these bonds.
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