It is tax time again, and investors are bracing themselves for K-1 forms and other surprises. What can investors in exchange traded funds (ETFs) be in store for?

This year, some investors in exchange-traded funds are going to be receiving K-1s, too. This will be nothing short of confusing, says Robert N. Gordon for Investment News, since the forms reflect an investor’s proportionate share of a partnership’s taxable income or loss. [Van Eck Proposes Contango Killing ETF.]

Here are some of the points to understanding why this happens:

  • Some commodity ETFs are vehicles that invest directly in the commodities themselves, while other are investing in futures contracts based on the commodity.
  • Neither direct-invest nor futures-type commodities ETFs are set up as standard mutual funds. Rather, they are treated as grantor trusts, or limited partnerships in order to be non-taxable entities. As such, these limited partnerships and grantor trusts flow their taxable characteristics through to their owners.
  • Taxes are calculated and allocated proportionately to each investor monthly. The income realized is allocated to whoever owned the units on the last day of the month. Any gain or loss passed through is to be included in the investor’s tax return. [8 Things You May Not Know About ETFs and Taxes.]

The way to handle these tax ramifications should be discussed with a tax professional, though, since we’re not accountants and every situation is unique!

Tisha Guerrero contributed to this article.

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.