Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Got a K-1 for a Powershares Fund--What does it mean?
Posted by: emilylynn, February 19, 2009 01:04AM
I am pretty new to investing and prepared my first Schedule D just last year.

This year, in addition to the normal tax information that I got from Ameritrade, I received a "K-1" form directly from DB Commodity Services LLC. It pertains to a fund (DBC) that I held through Ameritrade for a short time this year.

The materials begin: "Please find enclosed your PowerShares DB Commodity Index Tracking Fund (DBC) tax package for 2008. It contains important information that you will need to prepare your federal and state income tax returs for 2008." The package includes a Schedule K-1, an "Ownership Schedule," a "Sales Schedule," and an IRS instruction booklet for partners.

I am confused. What partnership, and what does this have to do with me and my taxes? Is there some information from the K-1 that needs to be incorporated into my return, aside from the normal gains and losses information that I get from Ameritrade?

Thank in advance for your help.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: DeeDee, February 19, 2009 01:28AM
The Schedule K-1 shows you what you should report ($ amount) and where to report it (the appropriate IRS form). The Sch K-1 depicts your share of the partnership income/expenses for the year. Just read the information carefully and it should be easy to determine how to report the income/expenses.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: emilylynn, February 19, 2009 02:13AM
I am still totally confused about this--I never knew I was a "partner."

Can I assume that if I report this on whatever line on my tax return corresponds to K-1 income, that I can omit it from my Schedule D?

This is a heck of a lot of heartburn for a $14.00 gain. I wish I had never bought this fund.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: DeeDee, February 19, 2009 02:36AM
Why would it be on your Sch D? Did you sell it? Or does the K-1 show capital gains distributions, which are reported on Sch D? These K-1 are usually pretty straightforward and you received yours early. Most taxpayers wait until at least March to receive Sch K-1s.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: emilylynn, February 19, 2009 02:53AM
I apologize for being thick, but I'm really a novice at this. . .

I was just of the belief that when you buy $1,000 worth of a fund, and you sell it at $1,014, you have a capital gain of $14.00 that must be reported on Schedule D.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: Art, February 19, 2009 04:15AM
Apparently you are a partner here, and in addition to having a gain or loss on selling, you also had income and deductions and stuff of the partnership passed to each of the partners. So if the partnership earned interest on a US Savings bond, you would have that interest passed though to you and you report it on your form 1040 schedule B. And if you pay a state income tax you exclude your US savings boind interest on the state tax return.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, February 19, 2009 04:49PM
If you go out to www.taxpackagessupport.com you'll see that a number of PowerShare ETFs apparently been set up as publicly traded partnerships with K1Ps to all owneres of partnership units during the year.

If you get a K1P, you'll need to put it into your tax software to carry all income/losses around your 1040.

I would imagine you would also be subject to the publicly traded partnership rules (look at IRS pubs on K1s for more information).

Now I would imagine you will have a final K1P for your investment, so everything will clear out ok, though you might find you have some section 1231 income you'll need to report on form 4797 if you got any cash distributions while you owned your shares and you'll need to adjust your cost basis on your SCH D entry to report your capital gain/loss on your investment.

Now if you didn't have a final K1 (i.e. you owned shares at the end of the year), your life would have been more complicated since if you had any capital losses to report, you would have only been able to take those losses to the amount of income you report off the K1P and the rest of the SCH D losses would have been subject to passive loss rules and pushed off to a few tax year when you finally got enough income to write off the losses or finally got a final K1P to clear everything out in that final tax year).

It appears that a number of new ETFs and other funds being created by hedge funds that have gone public in the past couple years now increase the likelihood that you'll get a K1P to deal with during a tax year. I know this will surprise a number of investors for 2008 and future years and I expect to see more tax clients coming to my desk with these K1Ps wondering what it going on.

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, February 19, 2009 05:10PM
I took a quick look at the prospectuses for some of these Powershare ETFs, and it appears that they are set up as Delaware Statutory Trusts.

I wonder - rather than a K1P, did you get a K1E on your investment?

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, February 19, 2009 05:33PM
Take a look at the prospectus for your investment. I happened to and found on page 132+ tax related information for your investment.

I looks like each of the funds are set up to be publicly traded partnerships and taxed as such. So basically when you bought these shares in 2008, you actually were buying units in a partnership and as a result at the end of the year you got your K1P to cover your partnership tax information.

One question I do have for your investment: Was any of your income broken out to different states? If so, you might have some non-resident state tax liabilities to deal with for 2008 as well. Now PTPs normally don't report your name and income level to individual states unless you had $500 or more in income to any one state in one year, so its unlikely you'll have to worry about any state coming after you for state taxes. But it may complicate other things on your tax forms for 2008 depending on what is in your K1 package for 2008.

Good Luck. If you have any other questions on PTPs feel free to post them to this site and we'll do our best to pass along what is going on with them.

Roger

PS If you invested in any other Powershare ETFs, I would suggest checking the prospectus information on them too (available under the stock symbol you invested in/traded) and see if you might have other K1Ps coming your way that you might need to deal with for your 1040 and possible state returns.....

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, February 19, 2009 05:57PM

Took a look at the www.naptp.org web site, which has a wealth of PTP related information.

Going to the PTP101 area and listing the PTPs to see what states they show income to, it looks like all the Powershare DB funds list New York as where they do business.

So it looks like all your business income that your K1 PTP might throw off will be subject to New York state taxes and you might need to do a non-resident NY state tax return if you don't live in NY.

Hope this helps...

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: Art, February 20, 2009 03:42AM
I assume K1P is a software term for Form 1065 Sch K-1 and K1E is Form 1041 ditto?

FWIW my software doesn't use K1P and K1E terms. Nor does it use W2T and W2S which I understand somone does.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: elmhursttax, March 3, 2009 03:30AM
I also received a K-1 from Powershares Commodity ETF. I have a large loss on Line 11 coded as 1256 contracts and straddles. Is this a passive loss? I also have a capital loss and distributions. Tax software puts the line 11 loss on form 6781 but doesn't go any further. Help.

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, March 3, 2009 09:28PM
The issue on the passive losses kind of depends on whether you have a final K1 or not for that PTP.

If the K1 is final, the tax software should carry those losses to where they need to go on your 1040.

Now if the K1 is not final, then yes you can end up with passive losses popping up on your 1040 tied to that K1 (I've had that happen to me before on SCH D losses a few years back, so I wouldn't be surprised to see something like that pop up on a 1256 contract).

I would suggest looking at all the flags you set in your software to make sure you didn't miss one (like the marking the k1 final if that is what you have) as well as other flags you might have in the software package. Sometimes all you have to have is a 'Y' where a 'N' answer should be - or visa versa, and all of the sudden things you though should show up a certain way will not.

Now if you have checked that and you do have passive losses carrying forward on the 1040, then likely you'll only get them when one of two things come up in the future on your PTP investment:
1) You generate some income off future K1s that allow you to take some of those losses.
2) You finally sell all your shares in the PTP as of 12/31 of the tax year, leaving you a final K1 that allows the software to take all those passive losses.

Roger

Re: Got a K-1 for a Powershares Fund--Can I skip filing?
Posted by: jyu, March 5, 2009 01:45AM
I have a loss from a short-term holding of the Powershares Fund. Do I need to file a Schedule K-1? [www.fidelity.cch.com] sounds like I can just treat it as a regular short-term realized capital loss like any other stocks and just file the schedule D as usual. Am I reading that correctly?

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, March 9, 2009 07:56PM
If you have a short term loss from powershares fund, is the K1 you got marked as a final one (the box on the top of the K1 for final marked with an 'X')? If so you should be able to put it in on SCH D as usual as long as you didn't buy new shares in Jan 2009 30 or fewer days after you had your last 2008 sale - then the SCH D entry would be a wash sale.

If the K1 wasn't final, then you may have a passive loss to deal with on your SCH D.

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: HammerFist13, March 11, 2009 03:03AM
Thanks for all of the great information Roger. I have a quick question. I also received a Schedule K-1 (form 1065) for purchasing and selling shares of UUP (Powershares DB US Dollar Index Bullish Fund) in my rollover IRA account. Do I still need to report this? I thought that all gains in an IRA were tax deferred?

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, March 12, 2009 06:44PM
The K-1s for PTPs work alittle different in a retirement account.

Generally only one number on the K-1 is of importance, that is for unrelated business taxable income (box 20V).

You need to add up all your K-1s 20V income from your retirement account and see if its $1000 or more.

If so, a form 990 will need to be filed on your behalf (I understand the broker would do this and charge you for that work) and some taxes on that UBTI income would get taxed.

Now for most PTPs, the 20V income is generally negative, so unless you have a huge amounts invested in PTPs in your retirement accounts, it's somewhat unlikely you would ever get to the level to trigger that tax bill.

I know for myself I've had PTPs of one sort or another in my IRAs for many years, quite often having a number of K-1 packages coming my way. But in 8 years of such investing, I think the most net positive UBTI income I've had is a positive couple hundred bucks - still well short of that $1000 limit. Most years the sum of all my UBTI income generally ended up with a net negative UBTI income.

Hope that helps.

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: emilylynn, March 15, 2009 08:14PM
Roger, are you saying that if the asset was held entirely within a retirement account, nothing need be reported on your tax return so long as the sum of the totals in Box 20V do not exceed $1,000? My K-1 shows a small negative number in Box 1 (ordinary income), a small positive number in Box 5 (interest income), a large negative number in Box 11C (Other Income--Loss), and a small positive number in Box 20A (Other Information).

I'm sorry for all the questions. I will never, never invest in anything but Vanguard funds again!

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: rbotterb, March 16, 2009 07:07PM
Yes, if your MLP/ETF Partnership investments are in a 401k or IRA, the only issue is the UBTI income (box 20V) and whether is all adds up to $1000 or more.

The rest of the K1 income, expenses, state income, etc doesn't impact anything. You don't report that income within the retirement account nor get anything from the expenses.

This is one of the reasons more and more investors who like these ETFs and MLPs but don't want to deal with the tax related K1 brain damage are only investing in these investments in a retirement account.

Hope that clarifies everything.

Roger

Re: Got a K-1 for a Powershares Fund--What does it mean?
Posted by: emilylynn, March 16, 2009 08:49PM
Thank you, Roger. You've been a great help!



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