Business & farm

However you managed to become a unitholder, and regardless of the value of the MLP, from the IRS's perspective you're still a partner in an on-going legal entity.  So when I say "sell" I mean end your participation in whatever way has the partnership stop sending you K-1's.

As for the tax accounting, you still get to declare a capital gain (or in this case loss) from getting out of the partnership.  It's just that in this case, you'll have to go through a bunch of gymnastics to figure out what your loss is.

For example, let's say your K-1 showed you "getting" $100 on line 1 even though you got no cash.  And when you fill out your taxes, you find that you have a bill for $15 on that $100.  Despite the fact that that just feels wrong and unfair (you got nothing, and actually paid $15), here's how it works out:  let's say you originally paid $200 for this.  You "sell" it for $0.  When you go to calculate your loss, it won't be ($200).  It will be ($300).  The $100 you were forced to recognize even though you never got it is added to your purchase price.  You tell the IRS you paid $300, not $200, for this and get a bigger capital loss.

So in the end, the X you would have used to offset other capital gains becomes Y, just like you said.  But there's nothing fishy -- the difference between X and Y showed up on the K-1s AND you paid tax on that difference.  Now you're just getting it back in this final sale.