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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Are TIPS really tax disadvantaged? Rethinking the tax treatment of U.S. Treasury Inflation Indexed Securities
Scott E. Hein
Jeffrey M. Mercer
Abstract

In 1997 the U.S. Treasury introduced Inflation Indexed (or Protected) Securities with substantial promotional fanfare. Yet, due in part to what some in the finance profession have described as a "tax disadvantage" placed upon TIPS, many are questioning whether they should appeal to a wide audience. Some, in fact, advise holding TIPS only in tax-deferred accounts. In this paper, the authors develop a framework that allows us to demonstrate that the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Utilizing an after-tax valuation approach, they further show that under relatively conservative projections for inflation, TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities.


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Scott E. Hein & Jeffrey M. Mercer, Are TIPS really tax disadvantaged? Rethinking the tax treatment of U.S. Treasury Inflation Indexed Securities, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2003-9, 2003.
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Keywords: Investments ; Taxation ; Securities ; Interest rates ; Income tax
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