In general, TIPS interest income is taxed at the same federal income tax rates as any other nominal Treasury security. They also attract Phantom Income taxation, which is the tax levied against the growth in value of the premium during inflation. However, by employing deflation adjustments to balance it, you can lessen the effect of this fee. Typically, deflation causes your principal value to decrease. The alternate strategy is to purchase your TIPs using a tax-deferred account, but you should speak with a tax professional to see whether this is a wise course of action.