There are no silly questions when it comes to these K-1s. Again, I am not a tax expert, so take my attempts at answers with a grain of salt. The "cumulative adjustment to tax basis" column is showing you which transactions in your history caused an adjustment to your tax basis (or cost basis) and the amount of that adjustment. Note that if you total up this column, it should equal the total implied by the K-1 boxes (for most K-1s this would mean adding up boxes 1 through 11 and subtracting 12 through 13). For the K-1s I've seen, it should also equals the box L current year increase (decrease) entry. Basically, it is showing you how the partnership distributed its activities to you throughout the year. Note that I've never seen a daytrade cause a non-zero "cumulative adjustment to tax basis." It always seems to be something I've held long overnight that triggers the partnership to pass on its income or deductions to me. This "cumulative adjustment to tax basis" is indeed showing you when and how your cost basis in the partnership is affected during the year. Note that if the partnership distributes $1,000 to you via Box 11 C, then your cost basis will increase by the same amount. You will report the $1,000 as Sec. 1256 contract income (Form 6781, Line 1) but your cost basis will increase by $1,000 as well. So when you exit the K-1 position, you won't have to pay taxes on the first $1,000 in profit (if you have a profit). I think the "cumulative adjustment to tax basis" column can be used to accurately keep track of your cost basis intra-year. Note that if you don't liquidate the K-1 position entirely by year end, then you could be paying taxes on the distributed K-1 income, but not get any tax benefit for the increase in cost basis (yet). Only when you exit the position does the cost basis come into play. So you could pay more in taxes this year (on the distributed income) and then less the next year (because of the increased cost basis). Overall, it should approximately balance out. As to why you adjust your cost basis, I think the basic reasoning is that if you are getting income from the partnership, then it implies the shares that you own are worth less after the payment. It is like when a stock pays a dividend, the share price adjusts to reflect this dividend payment. If K-1 partnerships did not work this way, then no one would own them because you would be essentially double-taxed. And if you do not adjust your cost basis because of partnership income, then you would be incorrectly double-taxing yourself (which is probably why people say, "do no count the same gain/loss twice"). Yes, the income on the K-1 is mostly independent from the trading profits. The only thing that ties them together is that the income reported to you on the K-1 is calculated based on what days you held the stock long. Whether you made a profit or loss on the transactions has nothing to do with what is reported on the K-1 as your share of the partnership activities. However, if you report the K-1 income without adjusting your cost basis, then you are doing it incorrectly and harming yourself financially (assuming the K-1 income is positive). Again, I like to view these K-1s as just moving money from one spot to another. If you gain income from the K-1 partnership activities, then you must lose that same amount of income from your position in the stock (and vice versa). The end result will approximately be the same tax liability but you must dot the i's and cross the t's to report it in such a way that it will satisfy the IRS.
Thanks Spr, all these make sense. Now I have some minor thoughts: 1. My understanding is that, take the numbers on K-1, do: 1) report cell 11 as Section 1256 contract on 6781, and report other non-zero numbers as instructed on the Graphic Instruction of K-1, and 2) manually adjust cost basis on 8949 by the number in cell L. And that should be all that is needed to do. Correct? 2. The numbers in the 'cumulative adjustment to tax basis' cells in the Sales Schedule provided with K-1 add up to the exact amount of Part I, cell L "current year increase (decrease)". However, they do not add up to exactly the number in Part II, cell 11, Other Income. In my K-1, cell 11 is $14 higher than cell L (because there are numbers in Part II, cell 5, 8, and 13, and cell L is calculated by 'adding boxes 1 through 11 and subtracting boxes 12 through 13'). Per instructions on the Sales Schedule, some transactions' cost basis will need to be adjusted on 8949. Instead of changing the cost basis of every transaction with a non-zero 'cumulative adjustment to tax basis', I am planning to add one transaction manually to 8949 in TurboTax and select the 'trades not reported on 1099B' for that manually added trade. I plan to use the number in cell L as the cost for this transaction, and use 0 as the sales proceeds. I assume this shouldn't be different than adjusting specific transactions. Correct? Also, is it correct to use the number in cell L instead of the number in Part II, cell 11 for the above purpose? I think to get the same effect as adjusting the cost basis of specific transactions, the total of those adjustments should be used as a cost basis for the 'trade' (which didn't really take place but was created for adjustment purpose only). 3. Another reason why I want to add one transaction to adjust the overall tax basis on 8949 is that, the sales records listed on the Sales Schedule of the K-1 package are not accurate. Some trades listed in the sales records (with non-zero 'adjustment' number) didn't happen (comparing with my brokerage account record, which is accurate), or at least they didn't happen on the Acquired Date and Sales Date as listed on the Sales Schedule of the K-1 package. Therefore, it is quite impossible for me to match every transaction with non-zero numbers of 'cumulative adjustment to tax basis' to one specific transaction as imported from the 1099B into TurboTax. (for example it lists several sales of 100 shares each on a certain date, but I am sure I only made one sale of 100 shares on that date and those 100 shares were all that I held on that date; it also lists some sales on a certain date but my brokerage record shows that I didn't sell on that date). I don't understand why the K-1 package lists the sales as that, but I don't think it is something that I will ever figure out, like many other things about the whole K-1 concept. So I am thinking, to avoid any further confusion, I will just use the total adjustment to tax basis number to manually adjust it on 8949 in TurboTax. Do you think the mismatch of K-1 Sales Schedule and the brokerage account record should be a reason for any concern? (I really don't want to call ProShares again, because they are not helpful at all and they made it clear to me that no matter how the sales record on K-1 is revised, the numbers on K-1 won't change.) One thing I am sure of is that I will never touch SVXY or UVXY again. Many thanks
I'm not a tax professional, but I'll try to answer your questions anyway. 1. Did you hold a long position in SVXY or UVXY over the 2017-2018 year boundary? Or did you have a wash sale involving SVXY or UVXY that occurred over the 2017-2018 year boundary? If you answer "yes" to either of these questions, then you cannot simply add one transaction to adjust your cost basis because some of the cost basis adjustment cannot be realized in 2017. Once you liquidate the position entirely and there are no further wash sales, only then you can realize the cost basis adjustment completely. If you answer "no" to both of these questions, then you can manually adjust your cost basis with one transaction like you were planning to do. 2. I have a K-1 from a few years back where the non-zero boxes are: 11 C: $1,930 13 K: $4 L Current year increase (decrease): $1,926 The L current year increase is derived from the income ($1,930) minus the deductions ($4) = $1,926 I did not hold any of this stock over the year boundary and there were no wash sales involved. For this K-1 I would add a transaction to my tax return with sales of $0 and a cost basis of $1,926. So use the L Current year increase (decrease) rather than just 11 C because 11 C is just one component of what the partnership attributed to you. You want the total of all the partnership activities (which includes income and deductions) to calculate your cost basis adjustment. 3. Did you ever go short SVXY and UVXY during 2017? If you did, you will see those transactions written as AM BUY TO CVR and DI LOANED POS. Did you ever go short SVXY and UVXY during 2017 and hold this short position overnight? If you performed short sales and held them overnight then Tax Package Support (the company that generates these K-1s for ProShares) will modify your ownership schedule (without your approval) such that you never own a negative number of shares. This could mean changing the dates of AM BUY TO CVR or DI LOANED POS transactions. Or it could even involve combining transactions that are separate. The algorithm that they use is totally nonsensical. There is another firm (Partner DataLink) that handles short positions without screwing around with your ownership schedule. Unfortunately, you are stuck with Tax Package Support for SVXY and UVXY. The main question you need to ask yourself when you look at your K-1 is, "For the days that I held any SVXY or UVXY long overnight, is the K-1 showing that I am long the correct number of shares on the correct dates?" If not, you have a problem and you will either have to log into Tax Package Support and manually edit your ownership schedule using their website interface, call them and edit the entries over the phone, or mark up your ownership schedule (showing the changes that need to be done), date it, sign it and fax it to their fax #: 866-554-3842. They no longer publish this fax # but it still works. Another thing that could be causing your share counts to appear to be erroneous on the K-1 is when a stock splits or reverse splits. If there were splits or reverse splits, the K-1 will inform you on which dates those happened somewhere inside of it. This will change your share counts on the K-1 as compared to what your brokerage history shows. As with any organization, some of the customer support representatives at Tax Package Support know their stuff and some are entirely clueless. Hopefully if you call you get a good one but it is totally random in my experience. I wouldn't advise this, but if you are befuddled by this K-1 nonsense and want to just use one transaction to adjust your cost basis using L Current year increase (decrease), it is a viable option. You might have some errors in your K-1 if you do not go through and correct all the overnight long exposure transactions, but your tax liability will most likely be the same anyway since in the end this is just moving money around from one box to another to appease the accounting gods. Furthermore, if the IRS inquires about the K-1 you can claim that Tax Package Support modified your transactions and since they are a business that deals with these K-1s every year, they must know what they are doing (even though they don't). Since I am anal about these things, I correct the K-1 entries. And yes, I avoid trading any stock that sends out a K-1 if I can help it.
Spr, thanks again for the reply. To answer your questions: 1. I didn't hold SVXY over 2017/2018 year boundary. I exited all SVXY position in December 2017. I didn't have SVXY wash sale that spanned across the year boundary, either. So I guess those complications do not apply. 2. That makes sense. 3. I went through my brokerage record and the K-1 sales schedule one by one (uhhh....), and made the following discoveries: 1) All non-zero 'cumulative adjustment to tax basis' occur when the acquisition date and sale date are not in the same month. As long as they are in the same month as shown by ProShare, the number is zero. 2) ProShare uses 'first in first out basis' rule in its calculation (this is noted immediately below the Sales Schedule in 'Important Notice'). Therefore, ProShare always matches a purchase with the first sale thereafter, no matter whether that is what really happened. For example, if you buy 100 shares on Aug. 1, sell it on Sept.1, and in the meantime you buy 100 shares on Aug. 5, and sell it on Aug. 10, (you told the broker to sell specific shares instead of to use 'first in first out' when selling), ProShare will match the Aug.1 purchase with the Aug. 10 sale, and match the Aug. 5 purchase with the Sept. 1 sale, and it will do its calculation of passing along income based on this matching. Since only cross-month sales would lead to passed along income (and therefore adjustment to tax basis), the Aug. 1 purchase will have a zero adjustment to tax basis (although in fact it was sold in the following month), while the Aug. 5 purchase will have a non-zero number (although in fact the Aug. 5 purchase was sold within the month on Aug. 10). 1099B: SHARES BUY SELL 100 Aug. 1 Sept. 1 (31 days cross-month) (told broker to sell specific shares) 100 Aug. 5 Aug. 10 (5 days intra-month) (told broker to sell specific shares) ProShare K-1 Sales Schedule: SHARES BUY SELL Adjustment to Tax Basis 100 Aug. 1 Aug. 10 (9 days intra-month) 0 100 Aug. 5 Sept. 1 (26 days cross-month) non-zero 3) As a result of 2), the Sales Schedule does match 1099B in terms of numbers of shares held. However, the length of holding those shares on the Sales Schedule does not match that shown on 1099B. In the example in 2), instead of counting 31 days for cross-month holding/passing along income, ProShare counts 26 days. ProShares says that "How many shares you’ve held and the duration for which you’ve held them determines the portion of any income, gains or losses allocated to you through the K- 1." I am not sure how the changed duration of holding affects the passed-along income on K-1. But I am thinking if this is the method ProShare uses, then it is used for every partner and it should be something that is allowed, although ProShare does say in the note that investors could ask ProShares to change its method and reprocess K-1. I don't assume that most investors would do that. 4) I did discover something that is rather odd. The 1099B shows a few transactions that didn't match the detailed record in my brokerage account. For example, 1099B shows that I bought 200 shares on August 1, and sold such shares on a later date. The proceeds and cost amount match my brokerage account record. Then 1099B shows that I bought another 200 shares on August 1, and sold such shares on a later date (different from above)(proceeds and cost amount different from above and do not match anything in account history record). However, my brokerage account 'history of activity' shows that I only bought 200, not 200+200 shares on August 1, and the second purchase on 1099B appears to be 'made up'. The only explanation I can think of for these is that it could be because of wash sales. The 'made up' transactions on 1099B all appear to be around the time when there was a wash sale. So could it be that when I made purchase within 30 days after selling at a loss, the broker 'made up' transactions to increase my cost basis in order to 'disallow wash sale loss'? In a word, I did find some discrepancies, but not between 1099B and K-1 sales schedule, but between brokerage history activity and 1099B. But I guess it must be because I haven't figured out the rules around wash sale, not because the broker got the 1099B wrong. And in terms of ProShares using the 'first in first out basis' to calculated passed along income, I don't know how most investors handle it but I tend to go along with it because I don't think I understand everything about it to make the right corrections on the K-1 sales schedule and may in fact make it more of a mess than make it better. Any thoughts? Many thanks P.S. I did short SVXY once and bought to cover on the same day. That pair of transactions didn't even show up on the K-1 Sales Schedule. I called them to add it, they did but it appeared they ignored my words 'those were short sale and buy to cover' and added them as long. And the numbers on K-1 didn't change at all (guessing because it wasn't cross-month sale). And the codes they use for all transactions are AC for BUY and DA for SELL.
It doesn't matter if you designate certain shares to be sold at your broker when it comes to K-1s. All K-1s are interested in is the number of shares you own each evening. Even if there is a discrepancy between which shares are involved, the number of shares that you own each evening will not change. As for your brokerage 1099B vs brokerage history discrepancies, usually there are annotations or flags (like wash sale adjustment) on the 1099B describing what each transaction is. If you don't have a brokerage history vs K-1 discrepancy, then your K-1 is correct. For some of the K-1s, Tax Package Support will automatically remove all short sales from the K-1. That is probably why you did not see your short sale on the ownership schedule. It is not important because short sales are not a contributing factor to any values on the K-1.
That makes sense. Thank you very much. I am so done with this K-1 nonsense. Won't be touching any ETF that issues one. Sigh
Sir found your threads searching for K1 questions with SVXY. Please advise as your the only one I can find that may be able to help me. My situation was under a broker firm been buying shares since 2012 never sold them just held and bought more over time till 2018 Feb5 crash of volatility. After that I fired my broker and went to retail side of TD ameritrade trying to recoup my losses of -96% in short vol svxy. I just received my first K1 it says to file for 2017 tax year. I've never had a K1 one before which seems odd maybe cause I'm on my own now they sent me one. It shows over +$100,000 profits which has been completely washed out Feb5 2018. I've printed off posts from you to hopefully help my tax accountant but this will be my absolutely first time dealing with this. Since fired my broker and took over 2018 I'm now learning about SVXY holding overnight and years long might not be the best idea. Broker treated like holding long stock. Apparently my broker didn't know anything about it when got me into this. I always asked about taxes and never got any info how it works. Just filed what TD gave me. Am I now on the hook paying tax on these monies I never received? Should I sell my entire SVXY positions to claim/realize the loss that happened Feb5 for 2018? overall was -183k on 5 Feb 2018 Volpocalypse Any advice is very much appreciated.
Sorry to hear you got hurt by the Volpocalypse. The problem is that you *should* have received K-1s all along (since 2012). I am surprised that that information was not passed along to you from your broker. It is possible that they did not report the SVXY trades to the proper reporting authority (and so Tax Package Support never received those trades and so you never received a K-1 in the mail). My brokers have always passed on the trade information correctly and I always receive a K-1 in the mail from either Partner Data Link or Tax Package Support (for SVXY, it always come from Tax Package Support). If you held since 2012, you should have been paying tax on the partnership activities that are distributed to you every year and modifying your cost basis upwards because of these activities. The fact is that your tax returns from 2012 and on are probably incorrect because of this. I believe you can only amend tax returns at most three years in the past. I don't know how you should handle this. If your broker was negligent in not reporting your trades so that you did not receive a proper K-1 in years 2012 to the present, then it is possible the IRS would let you amend returns going back to 2012. I am just guessing here. Unfortunately, I think your situation is above my pay grade (which is free). It might be worth your time to seek out a tax specialist for this kind of situation and the only organization I have had dealings with is GreenTraderTax.
I appreciate the reply. Really don't know what's going to happen at this point. I'll see my tax person tomorrow whos been doing my taxes since that 2012 timeframe and see if any good outcome. Yes I'm baffled at this point. I know it's just free advice but in my position for the future should I sell off my shares to realize the huge loss in hopes it balances out my reaming this year? My losses were huge enough I've no issue selling out then buy some back. Just not sure I need to? Since this fund is geared and K1 does it matter and will it reflect the loss of FEB5? If that makes sense. No idea what my previous broker was doing if he received the K1, but I feel if he received anything would of passed it on. Proshares shows my buys all the way back to 2012 on the first form. The second is dealing with the split they had last year. I've 1.5x my position of shares after the FEB5 incident in hopes to crawl out of the losses. After this pans out maybe time to just cut loose and stay away. Watching the fund grow since 2012 was an amazing feat. I feel completely burned but there are some worse than me with options horror stories. I still have the clothes on my back. . . for now.
You might try and see if Tax Package Support will e-mail you your K-1s that you should have received for SVXY since 2012. Then you will have an accurate idea of the numbers you should have reported on your tax return every year since 2012. Note that just because you had a large gain in SVXY from 2012 on (until this year), does not have anything to do with the partnership activities that are passed on to you. The values of the boxes on your K-1s are based solely on the number of shares of SVXY you held when the parternship activites are distributed. Assuming the partnership activities reported positive income to you over the years, then your cost basis will increase by the same amount so when you finally do sell SVXY, you can realize a bigger loss. As for when you should realize your loss, that is something that only you can decide. Good luck and note that Volpocalypse can happen again. I wouldn't touch a product like SVXY.