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Tips of Taxation

Coupon Income.

The coupon bond method is a simplified method of accounting for qualified stated interest and inflation adjustments (OID) on certain indexed debt instruments. Under the coupon bond method, qualified stated interest is taken into account under the taxpayer’s regular method of accounting.

Inflation adjustment to Principal.

Any increase in the inflation-adjusted principal amount is also treated as income for the period in which the increase occurs. Income is measured by subtracting the inflation-adjusted principal amount of the security at the beginning of the year/period from the inflation-adjusted principal amount of the security at the end of the year/period.

Deflation adjustment to Principal.

The deflationary adjustment reduces the interest otherwise includible in income. If the amount of the deflationary adjustment exceeds the interest otherwise includible in income for the taxable year, the holder of the TIP Security treats the excess as an ordinary loss in the taxable year. If the deflation adjustment exceeds the interest otherwise includible in income by the holder with respect to the debt instrument for the taxable year, the excess is carried forward to offset interest income on the debt instrument in subsequent taxable years.

Minimum guarantee payment.

Certain inflation-indexed debt instruments may provide for an additional payment at maturity if the total amount of inflation-adjusted principal paid on the debt instrument is less than the instrument’s stated principal amount. If this is the case, a minimum guarantee payment is ignored until the payment is made. If a minimum guarantee payment is made, the payment is treated as interest on the date it is paid.