I invested (very foolishly as it turns out) in an EFT called UNG who buys natural gas futures.
I got a K1 from them today; had I known it was a limited partnership I never would have bought it. Their instructions for how to enter it on the income tax returns were sketchy, so I called them.
They told me to ignore it; sending them out is a formality, but nothing has to be reported to the IRS.
On the one hand that makes sense; it is just a stock, what goes on underneath does not matter. On the other hand, why would they be required to send a K1 if it is just supposed to be ignored.
Im surprised they didn't say, "consult your tax advisor." But then, that's why you're here! It isn't "just a stock." You do need to report the items on the Schedule K-1, and keep track of how that adjusts your basis in the security for when you sell it. In that sense it's more like a mutual fund that reinvests dividends and capital gains, except here it's reinvesting futures income net of expenses.
The only significant item is a capital loss. If I read form 6781 correctly, 40% goes on as short term and 60% goes on as long term. My basis goes up by the loss. Is that correct? I have bought 6 lots of it in 2009; I will have to sell them all, as otherwise determining the basis will be a nightmare.
Yes. And from there to Schedule D. You're doing this by hand?
It might be too late as your basis is already decreased by the above mentioned item. I think you can rely on the partner's analysis of capital account to determine your cost basis. Besides when you sell they will attach another schedule that will say how much of gain/loss is ordinary, and how much is capital.
TaxCut doesn't do K1s, so I try to avoid them, but didn't realize this ETF was a lp. Two years ago I used an accountant for my taxes and he charged me 5 hours for a K1; I guess he didn't do K1s either.
First - the 60/40 split and form 6781 is related to an investment in an IRC Section 1256 Straddle Transaction. This is NOT (let me repeat that NOT) the kind of investment for the average civilian to undertake on their own.
Second - you are correct to assume that if it didn't matter they wouldn't send it. You NEED to do something with this and you need to do it correctly, otherwise you face some love letters from the IRS. You can bet that if they sent the K-1 to you, they've filed it with the authorities as well.
Third - generally, your basis goes up by gains and down by losses, adjusted for infusions and distributions of cash from and by you.
Fourth - most basis calculations are more tedious that a nonpro thinks they should be. Such is life in the investment world. This is one of the reasons the IRS is mandating that brokerages issue basis info on sales now - though I must confess I'm not sure whether basis reporting is limited to mutual fund shares or if it applies to EFTs, partnership interests and stocks. The LP you're in may, or may not, include your basis when you sell.
Lastly - and this is one of my pet peeves - the average taxpayer has NO IDEA how much work may be involved in dealing with a K-1, especially if there are lots of activities, some passive and some active, and there are multiple states involved. AND it matters not a whit that the numbers from YOUR K-1 may be small - that does NOT change the amount of work involved in dealing with the K-1.
As for your accountant charging you 5 hours - This is why we use a flat fee schedule. It's YOUR job to keep the records and MY job to know the rules. What you pay me for is getting your records on the right forms in the right places. We charge a flat fee of $100 to deal K-1s, and we frequently discount that fee if the K-1s contain very few items.
Just be aware that there is a concept of inside basis and outside basis. The partner's capital account is the inside basis. The outside basis may be different. See
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in general the basis may be different when inheritance, gifting,purchasing is involved. So it could still be a nightmare. One thingI'm not sure of is: are the inside and outside basis the same when youoriginally bought UNG. In general they will not be, but if thepartnership makes an IRC 754 election then they will be equal. Idon't quite understand the details, but I suppose you could ask UNG ifthey made a 754 election. This question is on the master 1065 form,and it seems reasonable that they should tell you if they did it. Ifthe answer is yes they did do 754, then as long has you don't gift, orgive through inheritance the stock to someone, then inside and outsidebasis should be the same.
UNG makes these complicated trades internally. Ordinary people don't. But then again, FOREX trading is advertised to ordinary people, and I think it uses form 6781.
Aren't PTP required to include your basis when you sell? I tried looking for a rule, but couldn't find it, but thought I read it somewhere once.
You should receive a state K-1 (at least CA has a K-1) or a schedule saying ordinary income line 1 increased by -7 for CA, etc.
USO, which is similar for to UNG, but for oil, not gas, does have a Section 754 election in effect, judging from the instructions on my copy. Neither of them pays distributions. so their results are fully reflected in the price per unit. At least USO doesn't have Unrelated Business Taxable Income, so it may be appropriate for retirement accounts (unlike a lot of PTPs, that might cause your IRA to have to pay tax if they generate UBTI).
------ Was it in an IRA? I have similar ETFs in my IRA and can ignore the K-1s since IRA income is not taxed, only withdrawals are taxed. However, if it was in a margin account, the K-1 income would be taxed as passive gains.
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