- quote -

If [OID comes out as] a negative number, you do not
have any OID. Instead, you have a deflation
adjustment. A deflation adjustment generally is
used to offset interest income from the debt
instrument for the tax year. Show this offset as
an adjustment on your Form 1040, Schedule B,
in the same way you would show an OID adjustment. ...
You decrease your basis ...
by the deflation adjustment used to offset
interest income.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

As you may know, the way TIPS work is that the principal
amount of the bond is indexed to CPI-U. Each year the
inflation adjustment of the principal (which to date has
always been positive) is reported on 1099-OID and is fully
taxable even though no cash is received for the adjustment
(much like how interest accruals on a zero coupon bond work).

So, what happens if we have a drop in CPI-U and the principal
value of the bond is adjusted downward? Is it treated as
negative OID? Capital loss? Basis adjustment? Investment
expense? Something else?

--
Rich Carreiro rlc-news[at]rlcarr.com

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >