Presented here is the method I used to calculate my Form 1040 taxes using the Schedule K-1 information received for my USO shares.
DISCLAIMER: This information is provided for information purposes only. It is not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations. The rules are complex. As always, you should consult with your tax advisor regarding the application and impact of these rules on your particular situation.
Part III line 1
Ordinary business income (loss) - Reported amount: ($5)
Since United States Oil (USO) is a Publicly Traded Partnership (PTP), the ordinary business income (loss) reported on Schedule K-1 follows special rules.
Losses from a PTP may not be used to offset passive income from any other source. Each PTP is treated separately, and a PTP loss must be carried forward and used only against future income from that same PTP. Losses are also freed up upon a taxable disposition of all PTP shares.
Form 8582, Worksheet 3 and Worksheet 5 were used to keep a record of my unallowed loss reported for the USO shares this year. Each year, the unallowed losses will be carried forward until they are either offset by income, or until all of the USO shares are sold.
I will report on the method of treating this loss, as it applies to my fuel hedge, at a later date.
Part III line 5
Interest income - Reported amount: $57
The reported amount was added to all of the other interest income reported on Form 1040, Line 8a.
You must fill in and attach Schedule B if the total interest on Form 1040, line 8a is over $1500 or any of the other conditions listed at the beginning of the Schedule B instructions apply to you. The reported amount is then entered on Schedule B, Part I, Line 1.
This was the easiest reported entry to understand.
Part III line 11C
Sec. 1256 contracts & straddles - Reported amount: ($474)
The tax treatment of ETFs investing in commodity futures is different. For USO, gains (losses) can be realized throughout the year as positions are rolled or liquidated. In addition, at year-end, the value of the futures positions are treated as section 1256 contracts and are “marked-to-market.” Gains or losses on these contracts are then realized as 60% long-term and 40% short-term. Unlike ETFs that hold securities, gains or losses may be realized each year even if the shareholder does not sell the ETF.
Use Part I, Line 1 of Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, to report the gains and losses from all section 1256 contracts that are open at the end of the year, or that were closed out during the year. This includes the amount shown in box 11C of Schedule K-1. Part I was completely filled out. No other parts of Form 6781 were used, since they did not apply to me.
Under the marked to market system, 60% of the capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long the USO shares were held.
Enter the net amount of these gains and losses on Schedule D (Form 1040). Short-term gains or losses are included with the amount reported on Schedule D, Line 4. Long-term gains or losses are included with the amount reported on Schedule D, Line 11. Include a copy of Form 6781 with your income tax return.
Part III line 20A
Investment income - Reported amount: $57
The reported total investment income included on lines 5, 6a, 7, and 11A, of Schedule K-1 is reported here. This total is used in the calculations for Form 4952. If you itemize deductions using Schedule A (Form 1040), then the Investment Interest deduction reported on line 13 of Schedule A (Form 1040) is calculated using Form 4952.
The reported amount, of investment income, is entered on Form 4952, Line 4a. If Form 4952, Line 3 is zero, then Form 4952 does not have to be completed since you will have no interest expense deduction to report on Schedule A, Line 13. Include a copy of Form 4952, if it is used, with your income tax return.
I do not itemize deductions, so I did not need to use Form 4952, and I did not use the reported amount.
CUMULATIVE ADJUSTMENTS TO BASIS
Sales of USO shares are treated the same as any stock sale and are reported on Schedule D. The length of time that the shares are held determines whether the capital gains are long-term (greater than one year) or short-term (one year or less).
The Schedule K-1 “2006 SALES SCHEDULE” has a “cumulative adjustments to basis” (col 5) for each sale of USO shares made during the year 2006. This amount should be combined with the normal basis (cost+commission+fees) and used to determine the gain/loss to be reported on Schedule D. The IRS only checks the sales proceeds from transactions, so adjusting the cost basis will not cause any discrepancies.
I bought 52 USO shares on 6/16/2006 for $3401.64 (3396.64 + 5.00 commission). The cost per share is $65.41615. On 7/17/2006 I sold 3 shares for $212.04 (217.05 + 5.00 commission + 0.01 fee), and entered this sale price on Schedule D, Part I, line 1(d). The cost for the 3 shares is $196.25 (3 x 65.41615). For these shares, the “cumulative adjustments to basis” reported in the 2006 Sales Schedule, supplied by USO, is $8. The adjusted cost basis of the 3 shares is $204.25 (196.25 + 8.00), and I entered this “Cost or other basis” on Schedule D, Part I, line 1(e). The gain from the trade was $7.79 (212.04-204.25), and I entered this gain on Schedule D, Part I, line 1(f).
The instructions specify that an explanation of the basis must be attached if the actual cost is not used. A simple solution is to attach a filled 2006 Sales Schedule received from US oil. At the bottom of Schedule D. write “See Attached Schedule 1.” At the top of the 2006 Sales Schedule, label the form as Schedule 1 and include your name and social security number. Supporting statements are assembled in the same order as the schedules or forms they support, and attached last.
The adjusted basis should be entered into financial software such as Money or Quicken. Then when the information is passed to tax software, the basis will be correct.
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