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treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 1:17 pm
by kikie
if there was a spike in inflation, the value of this bond would go up
TreasuryDir. 04/29 3.875

so, does it NOT make sense to sell it to simplify my portfolio. It tends to complicate my tax preparation each year, and i'm not sure it makes much difference to hold it vs sell it


i'll leave out my portfolio outline and age for now

mahalo

Re: treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 3:23 pm
by #Cruncher
paix wrote:
  1. if there was a spike in inflation, the value of this bond would go up ... TreasuryDir. 04/29 3.875 The principal value of all TIPS goes up (or down) along with changes in the CPI. It doesn't have to be a "spike". Since they were first issued, the CPI has increased about 37.5%. The principal value of these TIPS has therefore increased from about $1,000 to about $1,375. You are responsible for reporting this change, known as OID, each year on your tax return in addition to the interest you've received. (1) Both these should be listed on Treasury Direct's form 1099.
  2. so, does it NOT make sense to sell it to simplify my portfolio. It tends to complicate my tax preparation each year Yes, individual TIPS do complicate tax preparation. A TIPS fund would be simpler.
  3. and i'm not sure it makes much difference to hold it vs sell it There could be a signficant after-tax difference. Since you hold these 30-year TIPS at TreasuryDirect, you must have bought them at auction in 1999 or 2000 at a price close to par. Prices have risen substantially since then. (2) If you were to sell today, you'd have a capital gain on the order of $750 per $1,000 bond. The flip side is that if you hold them, you'll receive a lot more interest over the next 17 years than if you sold and put the money into a TIPS fund. It's a complicated calculation: Federal and state taxex on long-term capital gains all this year versus Federal taxex on additional interest income (TIPS interest and OID are exempt from state taxes) spread over 17 years.
(1) The center section of this web page shows the OID year-by-year from 1999 thru 2011: Auction Prices, OID, and Interest for Apr 2029 TIPS
(2) 155% X 1.375 X $1,000 - $1,375 = $750: WSJ TIPS Quotes

Re: treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 3:54 pm
by kikie
#Cruncher wrote:
paix wrote:
  1. if there was a spike in inflation, the value of this bond would go up ... TreasuryDir. 04/29 3.875 The principal value of all TIPS goes up (or down) along with changes in the CPI. It doesn't have to be a "spike". Since they were first issued, the CPI has increased about 37.5%. The principal value of these TIPS has therefore increased from about $1,000 to about $1,375. You are responsible for reporting this change, known as OID, each year on your tax return in addition to the interest you've received. (1) Both these should be listed on Treasury Direct's form 1099.
  2. so, does it NOT make sense to sell it to simplify my portfolio. It tends to complicate my tax preparation each year Yes, individual TIPS do complicate tax preparation. A TIPS fund would be simpler.
  3. and i'm not sure it makes much difference to hold it vs sell it There could be a signficant after-tax difference. Since you hold these 30-year TIPS at TreasuryDirect, you must have bought them at auction in 1999 or 2000 at a price close to par. Prices have risen substantially since then. (2) If you were to sell today, you'd have a capital gain on the order of $750 per $1,000 bond. The flip side is that if you hold them, you'll receive a lot more interest over the next 17 years than if you sold and put the money into a TIPS fund. It's a complicated calculation: Federal and state taxex on long-term capital gains all this year versus Federal taxex on additional interest income (TIPS interest and OID are exempt from state taxes) spread over 17 years.
(1) The center section of this web page shows the OID year-by-year from 1999 thru 2011: Auction Prices, OID, and Interest for Apr 2029 TIPS
(2) 155% X 1.375 X $1,000 - $1,375 = $750: WSJ TIPS Quotes
I believe by paying the OID yearly, which I do, and what makes it a bit "complicated", I have already paid the cap gains ? no ?

Re: treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 4:13 pm
by #Cruncher
paix wrote:I believe by paying the OID yearly, which I do, and what makes it a bit "complicated", I have already paid the cap gains ? no ?
No. I deducted the OID in arriving at the approximate $750 capital gains figure. Here is how it would look on your tax return, assuming you bought at the initial auction price of 99.578 and sold on 4/1/2012 with the unadjusted price still being 155%. This is all per $1,000 bond:

Code: Select all

$ 2,137  Proceeds = $1,000 X 1.3788 X 155%
    996  Cost at initial auction = 99.578 X 10
    379  OID from 4/15/1999 to 4/1/2012 = $1,000 X (1.3788 - 1.000)
  1,375  Cost basis = 996 + 379
-------
$   762  Long-term capital gain = 2,137 - 1,375

Re: treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 4:46 pm
by beareconomy
Question for numbercruncher. So you say if you sold the tips and had long term capitol gains, you would have to pay state tax on top of the capital gains rate of 15%? Is that correct?

Re: treasury direct TIP pricing with changes in CPI

Posted: Thu Mar 15, 2012 7:09 pm
by #Cruncher
beareconomy wrote:if you sold the tips and had long term capitol gains, you would have to pay state tax on top of the capital gains rate of 15%? Is that correct?
I don't know about other states, but in New York long term gains are taxed as ordinary income; there is no preferential rate as there is with Federal taxes. And the fact that they are gains from the sale of a Treasury bond (whose interest and OID are exempted) "cuts no ice". For a NYC resident like me the same goes for the city income tax which is on top of the state income tax. Ouch!

Like paix I hold appreciated TIPS in a taxable account. Even if I lived in a state with no income tax, I'd still probably hold onto them; but living in NYC makes the decision easy.