This is just to remind anyone planning to purchase USO through
their retirement account that you will receive an end of year K-1
(and be required to pay tax on the earnings) if you make any money
on the trade. That's correct!! USO is a Limited
Partnership (LP) and there's a little known law on the books that
trumps the fact that you're investing through a tax deferred
account.
Happened to me a few years back; I questioned Fidelity about it,
they researched the issue and found that limited partnerships by
law must issue all shareholders K-1's at end of year, regardless of
whether investments are on a pre-tax or after tax basis. Not
saying therefore not to do the trade, just to be aware of the tax
consequences if doing so through a profit sharing plan, 401k plan
or IRA.
Posted by lessarda on 29th of Jun 2011 at 01:14 pm
It is only UBTI "Unrelated Business Taxable Income" in a
partnership exceeding $1K for the partner in a given year that
triggers a special 990T from the custodian and is taxable. UBTI is
notthe same as return of capital, which reduces basis in a
partnership. Also, it is likely to be only MLP's like KMP or EEP
that generate UBTI at all (and it could be negative rather than
positive). I got about 6 K-1's for IRA trades last year (including
USO and currency ETFs) and not one had any UBTI. So there was no
taxable event. The partnership does still have to send the K-1 no
matter what form of account you have.
Also, if you trade Kinder or Enbridge, you can use KMR & EEQ
rather than KMP & EEP to avoid the UBTI issue entirely because
they pay distributions in shares.
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Cautionary Note on Purchasing USO
Posted by RichieD on 29th of Jun 2011 at 07:21 am
This is just to remind anyone planning to purchase USO through their retirement account that you will receive an end of year K-1 (and be required to pay tax on the earnings) if you make any money on the trade. That's correct!! USO is a Limited Partnership (LP) and there's a little known law on the books that trumps the fact that you're investing through a tax deferred account.
Happened to me a few years back; I questioned Fidelity about it, they researched the issue and found that limited partnerships by law must issue all shareholders K-1's at end of year, regardless of whether investments are on a pre-tax or after tax basis. Not saying therefore not to do the trade, just to be aware of the tax consequences if doing so through a profit sharing plan, 401k plan or IRA.
A CPA has clarified this issue for me:
Posted by lessarda on 29th of Jun 2011 at 01:14 pm
It is only UBTI "Unrelated Business Taxable Income" in a partnership exceeding $1K for the partner in a given year that triggers a special 990T from the custodian and is taxable. UBTI is notthe same as return of capital, which reduces basis in a partnership. Also, it is likely to be only MLP's like KMP or EEP that generate UBTI at all (and it could be negative rather than positive). I got about 6 K-1's for IRA trades last year (including USO and currency ETFs) and not one had any UBTI. So there was no taxable event. The partnership does still have to send the K-1 no matter what form of account you have.
Also, if you trade Kinder or Enbridge, you can use KMR & EEQ rather than KMP & EEP to avoid the UBTI issue entirely because they pay distributions in shares.