Section 1256 gain shown on K-1

[ptrckquinn]

I bought and sold shares of UNG during the 2022 tax year.

I received a K1 from UNG which showed a Section 1256 gain (box 11C).   Turbotax shows this as income.

I thought that this would be offset by an increase in the basis when I sold the units.    The K-1 did show a basis increase but it was less than the amount of the gain.  

Does anyone have any experience with this that would be willing to share with me?

Patrick 

[GeorgeM777]

No, however, you are correct in that your basis in United States Natural Gas Fund, LP was increased by your allocable share of gain from, among other things, Futures Contracts.  The UNG prospectus states the following with regard to the income you received:  

These items must be reported without regard to the amount (if any) of cash or property the unitholder receives as a distribution from USNG during the taxable year.

Basis is very important if you were to receive a distribution of property or cash from UNG.  In that event, the taxability of such property or cash distribution would depend on your basis in UNG.  If your basis exceeded the amount of the property and/or cash received, then you would not owe any tax on that distribution.  However, your basis would decrease based on the total value of the property or cash distribution.   The amount of any distribution paid to you in excess of your basis would represent taxable income.

In your situation, it appears that during the period you were a unit holder/limited partner in UNG, there were no distributions, and thus, you just need to report the amount in box 11c on your Schedule K-1.  

[ptrckquinn]

Thank you for the response.   Yes, I entered the income in the program under box 11C.   I am still confused, however, why the my basis on the units did not increase the same amount as the distribution.  The basis increase was only 55% of the gain amount that was allocated to my units.

[GeorgeM777]

It's not clear why your basis did not increase commensurate with your distribution.  It is not uncommon for Schedule K-1s to include an attached statement providing additional details about the K-1 entries.  If there is such a statement with your Schedule K-1, you may want to review it.  

It is important to remember that the partnership isn't responsible for keeping the information needed to figure the basis of your partnership interest. Although the partnership does provide an analysis of the changes to your capital account in item L of Schedule K-1, that information is based on the partnership's books and records and cannot be used to figure your basis.  You can figure the adjusted basis of your partnership interest by adding items that increase your basis and then subtracting items that decrease your basis.  The IRS recommends that taxpayers use the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership to figure the basis of your interest in the partnership.

That Worksheet is located in the 2022 Partner’s Instructions for Schedule K-1 (Form 1065) at page 4 and the link to this document is provided below.

2022 Partner’s Instructions for Schedule K-1 (Form 1065)

@ptrckquinn