Commodities ETFs Can Be Confusing at Tax Time

June 3rd at 6:00am by Tom Lydon

310pxquestion_mark_3dA recent thread on the Yahoo Message Boards brought up an interesting issue about commodities exchange traded funds (ETFs): are investors being taxed for income they never actually saw?

For example, one person says that they made an actual profit of $4,335 and no interest. But on the K-1 form, a profit of $6,963 and interest of $207 was listed. What’s going on?

Blame it on the fact that taxes are just really, really confusing.

Some commodities ETFs are operated as partnerships, which means that it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

On the IRS’s website a form called Partner’s Instructions for Schedule K-1 (Form 1065) can be found.

The K-1 basically gives allocation for any gains or losses within the fund.

While we don’t know what the K-1 looks like for those posting on the Yahoo Message Board, we can take a look at an example.

If someone bought 1,000 shares of a commodity ETF for a total of $25,030 in March and sold the shares in April for $25,850, then the net gain is $820.

The K-1 shows interest income of $107 (this was interested earned in the fund for the time period the investor owned the fund); it also shows an income loss of $76 (this was a loss within the fund during the period); and it shows other deductions of $16.  So the total, $15, represents what happened in the fund during the time the investor owned the fund.  This $15 is accounted for in the K-1.

What isn’t accounted for is the short-term gain (remember it was held for about a month) of $805 ($820-$15).  This is what needs to be accounted for on your tax returns.

Use the tax package that the fund company provides.  It should include a Schedule K-1, ownership schedule and sales schedule.  The sales schedule is a worksheet that uses numbers from the K-1 and ownership schedule to determine your capital gain or loss.  It also tells you exactly what number should be placed in what column on Schedule D.

If you find K-1s too confusing, most of the underlying indexes are also available in exchange traded note (ETN) form, which report on a 1099.

Disclosure: We are not accountants, this is not tax advice and this information shouldn’t be used in the preparation of your taxes. For specific direction and advice, contact your accountant.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.