UVXY and its options

UVXY is treated as a partnership for tax purposes.
https://www.proshares.com/faqs/volatility-commodity-currency-proshares-taxation-faqs
  • I understand that Volatility, Commodity and Currency ProShares ETFs (“Fund” or “Funds”) are treated as partnerships for tax purposes. Can you give specifics on how I can expect my investment to be taxed?

    Partnerships are "pass-through" entities. The income and expenses of each Fund "flow through" to its shareholders. (This differs from mutual funds and most ETFs registered under the Investment Company Act of 1940, which pass through taxable income and capital gains in the form of distributions reported on a Form 1099.) Each shareholder of Volatility, Commodity or Currency ProShares ETF is directly responsible for reporting his or her pro rata portion of income, gains, losses, deductions or other taxable events in the ETF for the calendar year.

    While investors may incur trading profits or losses through buying and selling the Funds, they are also subject to tax on their portion of any income or gains passed through by the Trust. In addition to income and gains, each Fund can also pass through losses, which shareholders may use to reduce their personal taxes. The tax treatment of income, gains or losses depends on the Fund’s underlying positions. For example:
    • The Funds will earn income from debt securities and overnight investments. An investor’s pro rata portion of that income will be taxed at the investor’s ordinary income tax rate.
    • The Funds will invest in a range of derivative instruments, including futures and forward contracts. In general, open futures positions will be marked to market, with their gains and losses reportable as 60% long-term and 40% short- term. The reporting of gains and losses may vary depending on the specifics of a contract.
    • Commodity and Currency ProShares also enter into swap agreements and non-currency forwards that generally produce capital gains/losses that are likely short-term in character.


    Monthly financial statements in accordance with Generally Accepted Accounting Principles (GAAP) for each Fund will be posted on our website on each Fund’s Overview page. Be sure to consult your financial professional or a tax professional for advice as to your particular tax situation.

  • How do the Funds pass through capital gains or income to the investor?

    Unlike mutual funds and most ETFs, the Funds are not expected to make distributions with respect to capital gains or income. The Funds are treated as partnerships for tax purposes, so an investor’s allocated share of a Fund’s income, gains, losses and deductions is reported on a Schedule K-1. Investors will not receive a Form 1099-DIV, issued by most mutual funds and other ETFs, which itemizes the taxable distributions received by the investor.

    From a tax perspective, any distributions from the Fund that might occur will be characterized as nontaxable return of capital (lowering the investor’s cost basis). Additionally, each investor’s allotment of the Fund’s taxable income, as reported on the Schedule K-1, should increase or decrease the investor’s cost basis.

    Monthly GAAP financial statements for each Fund are posted on our website on each Fund’s Overview page.
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Options on UVXY should be treated as Section 1256 contracts, but your broker might classify them as equity options according to
https://greentradertax.com/how-to-apply-lower-tax-rates-to-volatility-options/
Before delving into the various products and their treatment, it’s important to note that Section 1256 rules apply to “non-equity” options and Section 1256 items receive the coveted lower 60/40 tax rates. (At the maximum tax brackets for 2017, the top Section 1256 contract tax rate is 28% — 12% lower than the top ordinary rate of 39.6%. See 60/40 rates table.)

Several brokerage firms, however, classify options on volatility products as “equity options” taxed as securities. Our CPA firm established a substantial authority position to treat most of these volatility options as non-equity options. Don’t expect brokers to correct 1099-Bs if the tax treatment is uncertain. Be prepared to depart from the 1099-B reporting and include an explanation in footnotes and Form 8275. If your tax savings is significant, it’s wise to obtain a substantial authority opinion from a qualified tax attorney to protect against accuracy-related tax penalties.
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And, is UVXY, a partnership, as you say, Sec. 1256?

Incidentally, I'm curious, do any brokers list UVXY's gain or losses or UVXY options' gains or losses as Sec. 1256 on the year-end 1099?
 
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SoCalOptionsWriter said:
And, is UVXY, a partnership, as you say, Sec. 1256?

Incidentally, I'm curious, do any brokers list UVXY's gain or losses or UVXY options' gains or losses as Sec. 1256 on the year-end 1099?
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UVXY does not appear to be a section 1256 contract.
https://www.irs.gov/pub/irs-access/f6781_accessible.pdf
upload_2023-9-14_23-0-58.png


I'd guess brokers will list the gain or loss from sales of UVXY on a 1099-B form (like for other sales of ETFs), and ProShares will send a K-1 for
https://www.proshares.com/faqs/volatility-commodity-currency-proshares-taxation-faqs
investor’s allocated share of a Fund’s income, gains, losses and deductions is reported on a Schedule K-1.
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I'm not an expert on taxes. In addition, my employer would not allow me to provide tax advise unless I was providing facts. This seems to be a gray area so the best I can do is refer you to the experts. I suggest you ask your broker if their 1099 vendor tags this symbol as 1256. That is your best resource.

SoCalOptionsWriter said:
Has nothing changed in six years?
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SoCalOptionsWriter said:
So the answer to my original question is yes then, I take it.
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Income passed down from the partnership‡ might get Section 1256 tax treatment.
Bing Chat said:
Yes, futures contracts traded in a partnership are subject to the 60/40 tax treatment under Section 1256 of the Internal Revenue Code (IRC). This means that 60% of the gains or losses are counted as long-term capital gains or losses, and the remaining 40% is counted as short term¹²⁴.

This tax treatment applies to U.S. regulated futures contracts, options on U.S. regulated futures contracts, and several other types of contracts¹. The maximum total tax rate stands at 26.8%².

When these gains or losses are passed to partners, they retain their character as 60% long-term and 40% short-term¹. This can result in significant tax savings throughout the income brackets¹.

However, tax treatments for these types of instruments can be incredibly complex, so it's recommended to consult with a tax professional for specific situations².

Source: Conversation with Bing, 9/15/2023
(1) Section 1256 Contracts | Green Trader Tax. https://greentradertax.com/trader-tax-center/tax-treatment/section-1256-contracts/.
(2) How Are Futures and Options Taxed? - Investopedia. https://www.investopedia.com/articles/active-trading/061015/how-are-futures-options-taxed.asp.
(3) How FOREX Trades Are Taxed - Investopedia. https://www.investopedia.com/articles/forex/09/forex-taxation-basics.asp.
(4) 2022 Form 6781 - Internal Revenue Service. https://www.irs.gov/pub/irs-pdf/f6781.pdf.
(5) undefined. https://greentradertax.com/tax-treatment-for-foreign-futures/).
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But, you'll probably save less in taxes than the cost of headache pills for dealing with the Schedule K-1.:)

‡This wouldn't apply to gain or loss from the sale of UVXY shares.
 
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