Headphones can distort when driven too loudly by an underpowered amp. I think of this as analog clipping.
But more often it is that the headphones are accurately reproducing the sound of digital clipping from the iPod/soundcard. When you use treble boost or bass boost, it is telling the soundcard to increase the loudness of the bass/treble. For CD quality music, you have 16 bits to represent the sound digitally. Most modern music is made to sound louder by using up as much of those 16 bits as possible. So when something is digitally boosted with EQ, the parts of the music that are already maxed out at 16 bits have nothing higher to be boosted to. The result is clipping (a.k.a. distortion).
The solution is as Vitor Machado said. Don't use EQ to boost the treble, but use EQ to cut the bass and mids. Then turn up the volume. If your iPod or media player doesn't let you do this, you can just use the bass reducer setting instead. Same result as treble boost, except with no digital clipping.
Clipping can also occur during recording if the sound is too loud for the microphone. It can also happen during the mixing/mastering process, if the producers try too hard to make the music sound louder. We as the consumers can't really do anything about these types of clipping. Except maybe use headphones that are less detailed. The details of the music won't come through as well, but neither will the flaws.
