Tax question on ETF 's

C

chrismontez

I own some USO and came across this post that is supposedly off the Stansberry & Associate Reseach newsletter:

"I purchased 500 shares of USO last year and held it for less than 2 weeks. I made a little over $2,000. In March this year I was informed in a K-10, I think it was, that I was also liable for over $3,000 in gains that I did not realized. I called the company and was told that they do not pay taxes themselves but profits or losses are passed on to the investors. So I paid personal income tax on a gain of over $5,000 and 60% was on income I did not receive. I'm glad I didn't trade more than 500 shares. If I would have traded enough shares I could have been a millionaire of unrealized gain. I know USO is widely recommended but I will never trade it again. Have you heard of this before?"

Does this scenario make sense to anyone here?
 
Maybe not. I was just informed that uso is a k-1 partnership that distriputes gains and loses at year end. In looking at the tax laws governing k-1 partnerships, if every shareholder is considered a partner for the period thay hold shares, I could see where something like this could happen. I also noted that if you receive k-1 income you are required to pay self-employment tax and medicaid tax on it. Interesting
 
I'm not sure how this works with ETF's but mutual funds pass through gains and losses on trades in the fund on a specified date. Someone purchasing the fund before it goes "X" and selling it afterwards would incure the capital gain or loss that was passed through for tax purposes even though no gain or loss was actually received by the new shareholder.
 
Quote from chrismontez:

Maybe not. I was just informed that uso is a k-1 partnership that distriputes gains and loses at year end. In looking at the tax laws governing k-1 partnerships, if every shareholder is considered a partner for the period thay hold shares, I could see where something like this could happen. I also noted that if you receive k-1 income you are required to pay self-employment tax and medicaid tax on it. Interesting
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There is small instruction brochure that comes with k-1 form at tax time and as far as I remember it stated that you own taxes for those specific items. Also make sure that it's your tax number written on the k-1 form since I've received multiple forms and some of them apparently listed the tax number of the partnership company.
 
Quote from chrismontez:

"I purchased 500 shares of USO last year and held it for less than 2 weeks. I made a little over $2,000. In March this year I was informed in a K-10, I think it was, that I was also liable for over $3,000 in gains that I did not realized."

Does this scenario make sense to anyone here?
More...

Warning: I am not a tax expert so to be sure, contact a professional tax advisor.

Gains from the company are passed through to you on the K-1. You are liable for those gains in terms of taxes. However, any gains passed through to you affect your cost basis in the partnership so if there were $3k in gains passed through to you, your cost basis would increase by $3k as well. If you completely exited all of your USO shares, then you would essentially be paying taxes on a $2k gain (not $5k).
 
Quote from chrismontez:

receive k-1 income you are required to pay self-employment tax and medicaid tax on it. Interesting
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This is not correct. Only if you are ACTIVELY engaged in a partnership do you have to pay self-emp and medicare. A k-1 is used to distribute income from Trusts as well and the income is a pass thru. The K-1 will tell you where to put the income on your personal 1040.
 
Doesn't make much sense to me so I'm just sitting here scratching my head until I get through all of the posts and maybe I will begin to understand.
 
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