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I received a K-1 from an ETF, as well as an insert with instructions on what to do with the numbers on it. This ETF was my only holding whose basis was not reported to the IRS.

The "Other income (loss)" field is equal to the difference between "Capital contributed during the year" and "Withdrawals & distributions" plus "Other deductions" minus "interest income". For the purposes of this example, let's call "Other income (loss)" $1000. The ETF paid no dividends and had no distributions.

The insert instructs me to use this in Form 6781, which then tells me to ascribe $400 of this to short term gains on "Schedule D or Form 8949", and $600 to long term gains on "Schedule D or Form 8949".

In the 1099 substitute they sent, my brokerage told me that since they have not reported the basis for my trades in this ETF to the IRS, I should use Form 8949... however their worksheet for form 8949 shows my overall gains from selling this ETF to be $900 (rather than $1000 - the difference appears to arise from proceeds not equaling K-1's capital distributed... cost and capital contributed match, modulo brokerage fee).

Should I apportion the proceeds of each sale 40% ST, 60% LT on 8949? If so, should I use my brokerage's figures or the ETF's? And then if I do that, should it be included on Schedule D lines 2 and 9 rather than 4 and 11? And do I use the $900 figure or the $1000?

What I actually did was to ignore 8949 and instead use lines 4 and 11 of Schedule D, since I could not figure out how (or whether) to prorate the proceeds from each sale of the ETF. If this was an incorrect decision, how bad of a misstep was it (I'd still be paying the same taxes, AFAICT)?

  • Do you mean Form 6781, not 8761? – nanoman Jun 16 '18 at 7:09
  • @nanoman yes, thanks... Too many arbitrary and random looking numbers! – David Jun 16 '18 at 7:29
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I think you did the right thing. The brokerage's instruction to use Form 8949 because the basis wasn't reported sounds like a generic statement that doesn't take into account your receiving a K-1 for that ETF. The instructions for Form 6781 say that the gains should be listed on Schedule D lines 4 and 11 (the mention of Form 8949 is for those filing "other returns" besides 1040 for individuals and 1041 for estates and trusts).

If the brokerage reported the proceeds to the IRS on the 1099, there might appear to be "excess" proceeds not included in your Schedule D column (d). But the IRS should recognize that this was covered by the K-1 and Form 6781:

IRS is aware of the multiple reporting of these sales and will look for it in the matching program to prevent you from getting a letter from them.

EDIT: A K-1 reflects your stake in a partnership whose income is treated as "passed through" to the partners (ETF holders) whether or not it was distributed to them in cash. A brokerage may know what you bought and sold and what distributions you received, but only the partnership (ETF) knows its internal income that is also taxable to you and included on the K-1. Thus the brokerage's 1099 is likely incomplete, and the K-1 is more definitive. For example:

Commodity-pool ETFs mark to market their gains, losses and income made throughout the year, then pass on the tax liability to their shareholders. That means if your commodity ETF has a good year, you'll probably have to write a check to the IRS, even if you didn't touch your shares.

EDIT: K-1s are complex, and while total income should theoretically balance out once the holding is fully liquidated, there are stories of people owing taxes on partnership ETFs for money they never see. Taxes can treat different types of gains and losses asymmetrically.

Make sure you read all forms and instructions included with your K-1. There is often a "Sales Schedule" included that shows transactions, with specific basis adjustments, that should be reported on Forms 8949 and/or 4797.

You might also want to Google K-1 and the symbol of your ETF to see more specific discussion of how people handle it.

  • Could you incorporate a potential reason that the K-1 report disagrees with my brokerage about what the gains were? Had they agreed, I would have just used 8949, filling it out twice with 40% of each trade with box B and 60% each trade with box E. Couldn't do that using the K-1 figures because they weren't broken down by trade... Or is this properly a separate question? – David Jun 16 '18 at 7:52
  • But my brokerage knows how much I paid and how much I sold the shares for, and the ETF paid out no distributions while I held it. The only reason I can think of for the figures not to match would be a large deviation of share price from NAV, but that did not happen. Perhaps I'm just getting confused... but it looks like (based price at which I traded, the 1099) that the partnership "made me" $900... but the partnership are telling me they "made me" $1000. Is there $100 missing somewhere? – David Jun 16 '18 at 13:08
  • After thinking about this some more, I guess I'm just expecting two numbers to be equal that don't necessarily need to be... For tax purposes, whatever the actual realized capital gains of the position are irrelevant and the only thing that matters is the partnership's internal accounting, which they then pass on to the partner. Correct? – David Jun 16 '18 at 13:19
  • Is it theoretically possible to hold an ETF that internally makes a loss, but has a redemption restriction making it trade when you sell it at a premium... thus netting you a realized capital gain while recording a loss with the IRS due to the K1? – David Jun 16 '18 at 13:26

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