USO Taxes Reported on Schedule K-1
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.
Example:
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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April 15th, 2007 at 9:24 pm
Thanks for this information. I have a questio: when this interest income in Box 5 is paid? I never receive this payment, but I have to pay tax for this. It is not understandable for this.
April 16th, 2007 at 8:36 am
Hi David
Thanks for the question.
The answer is that USO makes no physical distribution of taxable interest by sending you a check. Instead, USO adjusts the cost basis of the shares on a monthly basis, which takes into account all distributions. That cumulative adjustments to basis is reported to you, on a “sales Schedule”, when USO shares are sold.
Ron
Below are excerpts from the USO Fund Prospectus
Tax Consequences of Ownership of Units
Taxation of USOF’s Income.
No U.S. federal income tax will be paid by USOF on its income. Instead, USOF will file annual information returns, and each U.S. unitholder will be required to report on its U.S. federal income tax return its allocable share of the income, gain, loss and deduction of USOF. For example, unitholders will take into account their share of ordinary income realized by USOF from accruals of interest on Treasuries and other investments, and their share of gain from Oil Futures Contracts and Other Oil Interests. These items must be reported without regard to the amount (if any) of cash or property the unitholder receives as a distribution from USOF during the taxable year. Consequently, a unitholder may be allocated income or gain by USOF but receive no cash distribution with which to pay its tax liability resulting from the allocation, or may receive a distribution that is
insufficient to pay such liability. Because the General Partner currently does not intend to make distributions, it is likely that in any year USOF realizes net income and/or gain that a U.S. unitholder will be required to pay taxes on its allocable share of such income or gain from sources other than USOF distributions.
In general, USOF will apply a monthly closing-of-the-books convention in determining allocations of economic profit or loss to unitholders. Income, gain, loss and deduction will be determined on a monthly “mark-to-market”
basis, taking into account our accrued income and deductions and realized and unrealized gains and losses for the month. These items will be allocated among the holders of units in proportion to the number of units owned by them as of the close of business on the last business day of the month. Items of taxable income, deduction, gain, loss and credit recognized by USOF for federal income tax purposes for any taxable year will be allocated among holders in a manner that equitably reflects the allocation of economic profit or loss. USOF intends to make the election
permitted by section 754 of the Code, which election will be irrevocable without the consent of the Service. The effect of this election will be that when a secondary market sale of our units occur, we will adjust the purchaser’s proportionate share of the tax basis of our assets to fair market value, as reflected in the price paid for the units, as if the purchaser had directly acquired an interest in our assets. The section 754 election is intended to eliminate disparities between a partner’s basis in its partnership interest and its share of the tax bases of the partnership’s
assets, so that the partner’s allocable share of taxable gain or loss on a disposition of an asset will correspond to its share of the appreciation or depreciation in the value of the asset since it acquired its interest. Depending on the price paid for units and the tax bases of USOF’s assets at the time of the purchase, the effect of the section 754 election on a purchaser of units may be favorable or unfavorable.