Avoid duplicating capital gains on K-1 and 1099-B when receiving shares as distribution from LLC partnership

[sumita71]

I bought private shares of a start-up through a marketplace (EquityZen)  in 2018 that matches investors with employees of start-ups and groups the investors in a Fund Series LLC specific to that start-up. I received a K-1 (1065) each year. Then eventually that company went public in 2021 and I received my shares in my brokerage account and sold them a few months later. On my 2021 (Final) K-1, Box 19, it shows a distribution amount in $$ with a code C next to it to reflect non-cash distribution; however, further in the TT questionnaire, it asks a number of questions about the partnership disposal to eventually calculate a long-term capital gain. And then separately, I have the 1099-B reported sale from my brokerage when I actually sold the (now publicly traded) stock. Where should I be entering the actual sale - K-1 or 1099-B? How to I adjust to avoid duplicate capital gains? 

[tagteam]

@nexchap 

@Mike9241 

[nexchap · Accepted solution]

@sumita71 You have two different taxable transactions:

1. The ending of the partnership:  you pay tax on the gains you made comparing the value of the stock you received (on the day you received it) to the basis you had in the partnership.  This would all be handled in the K-1 section of the TT interview.  TT will create a 1099-B for the capital gains in this transaction.
2. The sale of the stock, which is what you're broker is reporting.  Your capital gain here is the difference between the stocks value when you received it and when you sold it.  As long as your broker is reporting the correct cost basis on the 1099-B they sent you, you'd just report this like any other stock sale.

[Mike9241]

MLP reporting k-1 and 8949

Please follow these instructions. Incorrect entries can result in entering the sale twice or otherwise incorrectly. Also see the sales schedule that was included with the k-1

Enter the k-1 info
Check the PTP box
If total disposition proceed as follows:
Check final K-1 (s/b marked on actual k-1)
Check sold or otherwise disposed of entire interest
Use QuickZoom to get to the following section (maybe only available on desktop versions) but in online versions you should eventually get to a screen to enter this info.

On the k-1 disposition section for sales price use the ordinary income (sometimes you’ll see a column with the “751” or the words “Gain subject to recapture as ordinary income”. This info comes from the supplemental sales schedule that should have been provided.
Cost is zero
Ordinary income is the sales price.
This info flows to form 4797 line 10 and is taxed as ordinary income.

Now for the 8949.
The broker’s form is probably coded as B or E – sales proceeds but not cost basis reported to the IRS. This is because the broker does not track the tax basis. It used what you paid originally which is not correct.

The correct tax basis is:
What you paid originally, should be the same as what is on 1099-B as cost,
Then there is a column on the sales schedule that says cumulative adjustment to basis. If it’s positive add it to the original cost. If it’s negative subtract the amount.
Finally add the amount of ordinary income reported above.
The result is your corrected cost basis for form 8949.

Some other things. Look at lines 20Z1. That number should be added to the ordinary income above for reporting the 199A (qualified business income from the PTP). You don’t have to enter this but then you lose out on a tax deduction = 20% of this amount.

[sumita71]

Mike - Thanks for this info, but what I've invested in (an EquityZen Fund) is not a PTP or MLP - so I don't think steps you're describing below are completely accurate. It's an LLC formed for acquiring shares of private company stock.

[sumita71]

nexchap - great response, but that response leads me to another question. My interest in the LLC partnership was long-term (>1 year), so I assume long term capital gains on the K-1. Once I received the shares in my brokerage account, I sold within a few months (<1 year), so I assume short term capital gain? Practically speaking, I owned the same asset (3,810 shares of a company stock) for more than 3-years. However, from a legal/tax perspective b/c I owned the shares via an LLC partnership initially and then directly when the partnership ended, its treated as two different assets?

[nexchap]

@sumita71 Correct on the long-term (for the LLC) and short-term (for the stock).  And also correct on the reason its two different transactions.  Partnerships have their own unique set of tax requirements, so when yours ended you have to settle up with the IRS, regardless of what they gave you on liquidation.  That is, they handed you stock, but they could have handed you cash, bullion, or barrels of oil.  The IRS doesn't care.  They just want their cut for that specific transaction.