Questions Regarding Reporting of Schedule K-1s Received From Stock Investments

1. The overlap is computing the basis. Hopefully all of that is done for your by the Entity. Yes, report the K-1. If all the shares in the Entity have been sold, then the K-1 should be a final K-1 and you may need to do some detective work to see if you need to report a gain/loss due to basis. 

2. Ignore any from Roth IRA. 1099R is used to report reportable events.

Your client doesn't own stock - he owns units in a publicly traded partnership / master limited partnership, which I'm sure he thinks of as being "just like stock." I tell people they can expect to pay at least an additional $100 in tax prep fees every year they own those stupid things, with an additional $150 per purchase or sale in a year. Getting the tax reporting right involves both knowing what the correct presentation is, and knowing how to get your software to produce that presentation.

1) The sale transaction is likely reported. Most brokers correctly report it as non-covered; some call it covered. The basis reported on the 1099-B is incorrect. There's a sales schedule towards the back of the K-1 showing what adjustments to make to determine the correct capital gain, AMT capital gain, ordinary gain, and AMT ordinary gain. 

The activity on page 1 of the K-1 (or, if you're unlucky enough to own a PTP that owns other PTPs, on the supplemental schedule by activity) is not related to the 1099-B, and gets reported following the normal K-1 rules. PTPs are generally pretty good about explaining what the appropriate tax treatment is. Be aware that checking the PTP box and the "delete next year (final K-1, free prior year unallowed passive losses)" box are required when either of them apply, because otherwise you're going to get an inappropriate presentation. 

You've probably got a schedule of state income and deductions. The sale schedule may also have footnotes telling you what percentage of your gain is taxable to which states. Your client may have a filing requirement in a lot more states than usual!

You should anticipate spending a lot of time learning about PTP taxation; it might make more sense to refer this client elsewhere.

2) Roth transactions belong to the Roth. If the amount of UBTI on the K-1s exceeds $1,000, the IRA has a tax return filing requirement and might owe tax. The custodian will often prepare / file the 990-T for the IRA if you ask them to, but they won't independently be aware of the filing requirement. IMHO PTPs are fundamentally inappropriate investments for IRAs.

Your reply is very enlightening. I also run into a similar situation.

You mentioned above " There's a sales schedule... showing what adjustments to make to determine the correct capital gain....". Just to confirm, the Cumulative Adjustment to Basis amount listed on the Sales Schedule should be used to adjust cost basis reported on Form 8949? I also noticed that the adjusted cost basis is shown on Withdrawal & Distribution line of K-1 Capital Account Analysis. Thanks!

The sales schedule has instructions saying exactly where to put what numbers to calculate your capital and ordinary gain, and the AMT amounts. You use the cumulative adjustments to arrive at outside basis, assuming you haven't been maintaining your own basis schedule. But then you have to further adjust the basis for the ordinary gain piece in determining your input for the capital gains piece.

The PTP's calculation of tax basis in disposed shares is used in maintaining the capital account, but it's not necessarily identical to the taxpayer's outside basis. This is mostly an issue if you have partial dispositions, where the partnership's treatment may differ from yours. The footnotes to the K-1 explain all this stuff in great detail, if in very small print.

Thank you, everyone, for your help. I have another question regarding Schedule K-1s issued by these stock investment partnerships.

The taxpayer is a Virginia resident. However, these two Form 1065 Schedule K-1s were issued by partnerships with out-of-state addresses. When preparing the state tax returns, should the K-1 income/loss be allocated to Virginia (the taxpayer's resident state) or to the state where each partnership is located?

Specifically:

1. Form 1065 Schedule K-1 – ProShares Ultra VIX: The partnership's address is in Maryland.
2. Form 1065 Schedule K-1 – 2X Long VIX: The partnership's address is in Florida.

Any guidance would be greatly appreciated. Thank you!

Thank you PhoebeRoberts. Have a great day!