How to elect short/long term for gains from USO ETF - K1 (1065) vs 1099B

[JamesChen]

Hi! Need some help with properly reporting my gains from USO ETF to avoid double taxation 

Context: I purchased all my USO shares in 2020 and received a K1 and reported "gains in my 2020 tax return (even though I did not sell any shares in 2020). I sold all my USO shares in 2021 and have received a final K1. 

Questions:

1. Should I enter my K1 as it is? how can I indicate the short term portion and long term portion? 90% of my USO shares have been held for more than one year at time of sell, therefore I think should be considered as long term gains. However, I can't indicate this when entering the K1.

2. Should I also enter the 1099B? do I need to adjust anything? in 2020, I did pay tax on ~$2K "gains" (I did not sell any shares in 2020 but it is considered as income in 2020 K1). Do I need to do anything to avoid double taxation? 

[nexchap]

You'll handle the sale in both the K-1 interview and in the 1099-B. 

In the K-1 interview, you only handle any Ordinary Income (if you have it).  You force any calculation of Cap Gain to 0.  There's no way to handle a short-term/long-term split here, but that doesn't matter for Ord Income.

In the 1099-B interview, you'll handle the actual Cap Gain, adjusting your cost basis as required to get the right Cap Gain.

Here's a longer discussion that addresses many, many follow-up questions:  https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/how-i-report-the-sale...

If you have other questions, you can post back on this thread or on that one.

[JamesChen]

Hi nextchap,

Thank you so much for the quick response. I read through the discussion link and it is very helpful. I just want to confirm that I got this correct. Below is my understanding, am I doing this the right way? I am gonna use some dummy numbers to keep it easy for me to follow. 

On my K1 form: I have value in the following sections

Part II section L

Beginning capital account: $5,000

Current year net income(loss): $2,000

Withdrawals and distributions: $7,000

Part III 

11 Other income (loss): $1,800

13 Other deductions: $200

I don't have any ordinary income on K1. When you say force Cap Gain to 0, do you mean the value I have in "Current year net income" and "11 Other income"? Can I just put 0 in all these fields, so they are showing up as 0? 

In my 1099-B form, it includes the following info

Quantity sold: 300

Date solde:  3/10/3021

Proceeds/Reported to IRS (box 1d): $7,500

Cost basis: N/A

In Turbo Tax, when completing the 1099-B form, I entered the transaction date and selected whether it is long term or short term, then I entered the following info

• Proceeds: entered $7,500 (from my 1099-B form)
• Cost basis: entered $7,000, which is the value I found on my Sales Schedule (came with the K1 form and it says form 8949 at the bottom) Column 6 "Cost basis" $7,000. In the instruction, it says that Column 6 = Column 4 (Purchases Price/initial Basis amount) + Column 5 (cumulative adjustments to basis). Is this what I should use as the cost basis?

Am I doing this right? Seems strange that with the adjusted cost basis, the total gain is now $500 vs. what's listed on the K1 which is $1,800 or $2,000. 

Thank you in advance and look forward to your response!! Much appreciated!! This is way to complex.....

[nexchap]

@JamesChen Agree its way too complex....

On the K-1 interview, there's a screen for entering the details of the sale.  Because you don't have Ord Income, you'd just enter 0 for everything here.  On the rest of the K-1 interview, you'd enter the values and line items as reported.  Note that the line 13 "other" deduction of $200 is going to need more info:  it could go to a variety of places on the return, so you'll be asked to provide an explanation of what it is.  Only the K-1 preparer (or the K-1 fine print) will be able to answer that.

On the 1099-B, $7000 would be the cost basis assuming the K-1 correctly shows what you originally paid as the Purchase Price.

As for understanding all this, the Part 11, section L stuff is just for your records.  But what its telling you is that the Partnership generated $2,000 in income.  Because you're a partner, you have to report that on your income taxes even though you didn't actually see the cash (TT does that when you enter the K-1 values).  But that's also why your cost basis is adjusted.  Assuming you paid $5000 for these shares, your Cap Gain would have been $2500 if your cost basis wasn't adjusted.  But recognizing that $2000 that is reported elsewhere, you're able to change your cost basis and only report a $500 Cap Gain.

[JamesChen]

Hi @nexchap Thanks again for your response. I have some additional questions on your guidance 

"On the rest of the K-1 interview, you'd enter the values and line items as reported." 

I don't have much info on my K1 form. Below are all the info I have in my K1 form. If I report $1800 to Part III box 11 (what's on my K1 form) in turbo tax, my tax due amount will increase and this $1800 is taxed with a default of 60% as short term and 40% as long term. This is not correct because I held majority of these shares for more than one year. It should be more like 90% as long term and 10% as short term, but I can't adjust in the K1.

Info on my K1 form 

Part II section L

Beginning capital account: $5,000

Current year net income(loss): $2,000

Withdrawals and distributions: $7,000

Part III 

11 Other income (loss): $1,800 (code "C")

13 Other deductions: $200 (code "W")

"Note that the line 13 "other" deduction of $200 is going to need more info:  it could go to a variety of places on the return, so you'll be asked to provide an explanation of what it is.  Only the K-1 preparer (or the K-1 fine print) will be able to answer that."

In my K1 form instructions, it says line 13 with a code "W" means "trader expenses". In turbo Tax, it did ask me for more details on code W however I don't see this description as an option, so I selected "I Have Another Description Item" and entered "trader expenses" as the description. Is this the right way to handle this? 

For the cost basis - in my Sales Schedule, I have

• Purchase Price/Initial basis amount (column 4):$5000 (which is close to the money I spent to purchase all the shares (the number I got from my Etrade account is slightly higher than this, about $20 difference)
• "Cumulative adjustments to basis" (column 5): $2000
• "Cost Basis" (column 6): $7000, which equals to column 5 plus column 4

So $7000 would be the correct cost basis? 

[nexchap]

@JamesChen The tax rules for line 11 are set at the 60% / 40% split regardless of holding period, so that's correct.

You've handled the $200 for trading expense correctly, but need to do more.  The partnership is telling you that it does trading, and you as a partner get to deduct your share of those expenses.  TT doesn't know how to handle this automatically, so it isn't doing anything with that $200.  It expects you to enter it again, claiming the deduction as though it was reported to you separately.  As to where you'd deduct that, I suspect you could claim it as an itemized deduction on Sched A, but am not sure about that.  You might want to post a separate question specifically on how to deduct trading expenses. 

On the cost basis, I'd use your actual purchase price (the 5020 or 4980), less 2000.  The 5000 on the K-1 is what was reported to the partner, but they don't verify that.  Your records are the best starting point.

[JamesChen]

Hi @nexchap Thank you. 

If I understood you correctly 

• For the $1800 income I have in K1 form cell "11. Other income (loss): C $1800" : I need to pay tax with a 60% & 40% split (even though I have had them for more than one year)
• Then when I report my 1099B, I need to pay tax on the $500 gain (= Proceeds $7500  - Actual purchase cost $5000 - Cumulative adjustments to basis $2000)

So MLP really have a high tax rate with the 60% & 40% split.....whereas regular stock, I would only need to pay capital gain tax rate after holding them for one year.  

[nexchap]

@JamesChen You understand correctly:  the partnership's investment in straddles transformed much of your long term gain into a short term gain.  For what its worth, most MLPs don't report straddle income, let alone make it their primary business.  But apparently that's most of what USO does, so the holding period becomes important if you focus simply on the tax rates.

[JamesChen]

Thank you @nexchap for all your help on this! It seems odd that USO reported all gains in line 11 with a code C, which flows through as straddles and contracts. In addition, it seems odd that in the K1 interview it asks you for acquire date and disposition date for your shares, when everything would then be defaulted into a 60% &40% mix....Is the 60% & 40% mix only applies to straddles and contracts income or does it apply to all 1065 forms?  

[nexchap]

@JamesChen You're confusing 1) what the partnership does and 2) what you do with the partnership. 

You can buy or sell shares of the partnership.  Those actions are taxed as normal long or short term, governed by the dates you buy and sell.

The partnership itself can be in all sorts of different businesses.  They can rent yachts.  They can drill for oil.  They can day-trade 24x7.  Whatever business they're in, they generate taxable events, which are passed to you on the K-1.  Line 11C is telling you that USO spent some of its time trading.

The only interaction between the two areas are how it impacts basis (i.e., when the partnership tells you to pay a bunch of tax on something, but doesn't give you any cash, that will increase your basis).