K-1 (1065) Proshares ETF

[skdoorn12]

New Circumstance for me. I think I understand how to be reported but would appreciate input from others who have seen this before.

Client made some short term trades of Proshare ETF's. Received 1099-B from Ameritrade reported realized gains for the sales made in 2011.

Now today when the client came to pick up his returns, he brought a stack of K-1 (1065)'s that he got in the mail today.

Reading the information that came along with the K1, it says that, "Proshare ETFs are treated as partnerships for tax purposes. Unlike mutual funds and most ETFs, which make payments of inc and CG and report them on 1099-Div, these must be reported on K1's.

I am assuming that like Capital Gains reported on the 1099-Div's, these are gains realized internally for the ETF at the time they sold a holding within the fund. Like mutual funds, all gains flow through to the shareholders at that time. These are then reported on Sch D just like capital gains would have been if reported on a 1099-DIV.

Seems straight forward but wanted another opinion as I have not seen this before. Thanks in advance for your feedback.

PS Client also rec'd mutiple K1's for the same ETF's but for Roth and Trad IRA's. As such, I assume no reporting is required on tax forms.

[FEDUKE404]

Track the K-1 information first

You have to be very careful with such K-1s. It is not infrequent for an investor to receive such a document, even though the "broker" statement shows regular income from the asset.

Sometimes such income is not (rightfully so!) included in the Form 1099-DIV/INT totals. Any dispositions of such assets will likely appear on the Form 1099-B.

Some of those funds will shunt numbers directly to Sch D, and even Form 6781 can come into play.

Sadly, many of the investors who own such assets are clueless as to what they really have gotten themselves into. MLPs/PTPs come to mind.

I think I sense a filing extension....

FE

[skdoorn12]

K1 information - FE reply

FE,

Thank you for the reply. Maybe you could comment again based on the following.

Client bought 150 shares of ProShares ETF and sold 150 shares 3 months later for a short term gain of $8000 which was reported as such on the 1099-B from Ameritrade. No other "income" was reported by Ameritrade on a 1099-DIV/INT.

K-1 reported short term gains of $5,700, minimal interest income of $6, and Other Income of $134. Per the notes included with the K-1, they specified that the $134 was to be reported on form 6781 which I did.

Can you clarify what you mean by tracking the K1 first? Thanks in advance for any add'l feedback you can provide. I want to understand this situation fully in the event I see it again someday.

[Koss]

Proshares

Which Proshares fund is it?

BMK

[skdoorn12]

proshares

Ultra Silver

[Koss]

Silver

I haven't worked with that particular fund.

But anything involving derivatives (futures, options, swaps, etc.) is likely to have some unusual tax implications. These funds are often required to use mark-to-market reporting of gains and losses, which means that unrealized gains and losses are taxed in the same way as realized gains and losses. That's a little oversimplified, but not much.

Like a traditional partnership, a "partner" in one of these things can get stuck paying tax on income that was not actually distributed to him. In a "regular" partnership, that tends to have an effect on the partner's capital account. That can happen in one of these funds, too, and it can make a difference when the "partner" cashes out by selling his entire interest in the partnership.

You may want to take a much closer look at this. You probably need to find out whether your client actually received any kind of distributions that even remotely resembled the $5700 that you are seeing on the K-1.

If he didn't actually receive that money, that doesn't mean it shouldn't be reported, and it certainly doesn't mean that it's not taxable. But there might be more to it than meets the eye.

The pass-through gains may increase the basis in the shares that he sold.

BMK

[skdoorn12]

1065 Proshares

Thanks for the input. I have asked to see the clients statements as well as if he rec'd any add'l distributions from the ETF. I did look up the ETF on Yahoo Finance and no distributions are shown there. There are some comments regarding the 1065 on the message board for the ETF as well that I read. Trying to get insights wherever I can to report this correctly for the client. If you have any other thoughts, I appreciate whatever you think may help.

[Koss]

Basis of the Stock

Skdoorn12 wrote:

Can you clarify what you mean by tracking the K1 first? Thanks in advance for any add'l feedback you can provide. I want to understand this situation fully in the event I see it again someday.

I kinda got interested in this issue, and I'm fairly certain that you need to adjust the basis of the stock that he sold.

In researching this, I ran across a post on a Yahoo! message board that describes what you are seeing, with just a bit more information. The post on the Yahoo! board does not provide an answer. In fact, the guy is a complete bonehead who is using TurboTax, and has no idea what he's doing. But I recommend that you read his post, and look at how the numbers relate to each other:

On my broker's 8949 I have 21 sh PROSHARES ULTRA SILVER with a sales price of 6,552.89 and a cost basis of 3,647.65 for a gain of 2,905.24.

I just received a K-1 with L showing capital contributed during the year is 3647.
Current year increase is 3227. Withdrawals and distributions is (6,874).
Part III lists (5) interest income as 1. (8) Net short-term capital gain as 3167. (11) Other income as C 67. And finally other deductions as K 8.

I have already imported the 8949 and attached it to Schedule D. How can I add the K-1? Should I just import it and delete the lines from the 8949/Schedule D? I have read all the posts here but I am still confused. This K1 is evil! It also adds a form 6781 in TurboTax, is that right?

Thanks so much, this has wasted too many hours of my time already!

I built a little spreadsheet to try to figure this out. I've attached the spreadsheet to this message as a PDF.

BMK

[Koss]

Schedule K-1

The short term gain on Schedule K-1 should go directly to line 5 of Schedule D.

If you don't adjust the basis of the shares on Form 8949, then you are probably duplicating some of the gain.

BMK

[skdoorn12]

K-1 - reply to BMK

Thank you for your work on this. I plugged in my numbers from the 1099B and K-1 and they worked just like your spreadsheet example.

I need to look it over more to try understand how this works. At 3am, nothing makes too much sense, especially this subject.

I appreciate you taking the time to look into this on my behalf (and my clients).

Thanks again.
Scott

[Koss]

Basis

In a very broad sense, I think what is happening with this fund is analogous to what happens with employee stock options and Code V on Form W-2.

With employee stock options, when you look at the Form 1099-B, and take the exercise price as the cost basis, you get a significant gain on Form 8949. But it's not correct, because most or all of the gain is already included in the wages reported in Box 1 of Form W-2, which flows directly to line 7 of Form 1040.

With this fund, when you look at the Form 1099-B, and take the original cost as the basis, you get a significant gain on Form 8949. But it's not correct, because most or all of the gain is already included in a capital gain distribution that is reported on Schedule K-1, which flows directly to line 5 of Schedule D.

In both cases, the stock sale has to be reported on Form 8949, but the basis needs to be adjusted to reflect the fact that the gain has been reported elsewhere.

BMK

[Koss]

Further Analysis

You're probably going to start wondering why I am spending so much time on this. I happen to be very interested in this topic, and later this year, I may teach a class on the tax treatment of derivative securities. This has been a great opportunity for me to review some of the more esoteric aspects of this stuff.

I worked up an actual tax return based on the numbers provided by the clueless investor on the Yahoo! message board. I am referring to the data in the message which I cited in my post above:

http://www.thetaxbook.com/forums/showthread.php?p=138065

I am providing links to what I think that guy's K-1 looks like, and to a complete tax return that shows how the stock sale is reported, and how the figures from Sch. K-1 transfer to the return.

The files exceed the size limits for this board, so I put them on our office server:

Sample Schedule K-1:

http://sgaweb.net/cbllc/ebox/bej27v05.pdf

Sample Tax Return:

http://sgaweb.net/cbllc/ebox/hru33r74.pdf

BMK

[skdoorn12]

BMK - Thanks again

The K-1 you produced looks just like my clients with the exception he still owns more shares so the ending capital account is not 0.

Thanks again. I wish I could take a few classes from you myself. I am sure I would learn a lot.

Hope you were able to enjoy your Easter and not work all day.

Scott

[Koss]

Capital Account

The K-1 you produced looks just like my clients with the exception he still owns more shares so the ending capital account is not 0.

That may make things more complicated.

If he still owned some shares at the end of the year, then you probably have to allocate the increase in the capital account between the shares that he sold and the shares that he still owns.

BMK

[skdoorn12]

More details for BMK - Care to comment?

Client purchased 96 shares 01/03/11, sold them 04/12/11. Cost basis $15322. Gain of $8716 on 1099B.

Purchased 67 shares 04/20/11, sold 04/26/11 for loss of $44. Cost basis was $21,329.

Purchased 60 shares 05/02/11 (split Oct 13 2:1). Cost Basis $20,439. Still owned EOY.
Purchased 19 shares 11/14/11. CB $1283. Still owned at EOY.

Total purchases during 2011 were $58,373.


Per K-1

Beginning Cap $0
Cap Contributed $58,370.
Current Inc in Cap $5,780
Withdrawal/dist $53,500
Ending Cap $10,650

Part III
Box 5 $6
Box 8 $5745
Box 11C $134
Box 13K $105


EOY Shares owned 139 valued at $41.65 totaling $5789.35.

Client rec'd no dividend distributions or payments of any kind from Proshares. I don't understand how W/D distributions on K1 state $53,500 when shares sold totaled $45,323.

Any comments would be appreciated.