Yes, your dividends and distributions were likely included on your Schedule K-1. As a way of background, an MLP tax filing is somewhat more complicated. Limited partners in an MLP receive a Schedule K-1. It lists all the income and deductions associated with the partner’s holdings. To start, the payments received by MLP investors are often called dividends, but they aren’t dividends like investors in stocks or mutual funds receive. These distributions generally represent only the investor’s share of the MLP’s net cash flow.
Unlike corporate dividends, an MLP’s cash distributions are considered a return of capital (ROC) and used to adjust the individual partner’s cost basis when the units are sold. At that point, the portion of the sale proceeds that results from adjusting the cost basis downward by the amount of the accumulated distributions, deductions, and depreciation becomes taxable as ordinary income, while the remaining portion is taxed at the capital gains rate.
The ROC portion of a distribution is outlined in the annual K-1 form that all MLPs send you at tax time. The ROC portion of a distribution, rather than be taxed right away, instead decreases your cost basis, potentially all the way to zero. At that point the distributions are taxed as long-term capital gains, just like qualified dividends. When you sell an MLP, then the government will recoup those deferred taxes, because your capital gain will be larger by the amount of your cumulative ROC.
@jmhart4
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