Do I Need to Report a UNG K-1 in My IRA?

Investors holding United States Natural Gas Fund (UNG) shares in an individual retirement account (IRA) may receive a Schedule K-1 tax form, raising concerns about reporting requirements. While IRAs are typically tax-deferred or tax-exempt, certain types of income reported on a K-1 could be taxable. Understanding how this applies to UNG is essential for compliance with IRS rules.

K-1 Documentation for UNG

The United States Natural Gas Fund (UNG) is a publicly traded partnership (PTP), meaning it does not pay corporate income tax. Instead, it passes income, deductions, and other tax attributes to investors. As a result, UNG issues a Schedule K-1 (Form 1065) to each unitholder, detailing their share of the fund’s taxable activity.

Unlike stocks that generate Form 1099 for dividends and capital gains, a K-1 reports partnership income, which may include interest, capital gains, and deductions. The document typically arrives in March, later than 1099 forms, due to the additional time needed to finalize partnership financials. Delays in receiving a K-1 can impact tax filing timelines, potentially requiring an extension.

The K-1 for UNG outlines components such as ordinary business income (or loss), capital gains, and deductions. It may also include tax preference items relevant for alternative minimum tax (AMT) calculations. Additionally, the form provides details on the investor’s share of the partnership’s liabilities, which can affect basis calculations and future tax obligations.

Reporting Within an IRA

When an investment is held in an IRA, the account itself is a tax-advantaged entity, meaning income and gains are generally not reported on the account holder’s personal tax return. This applies to most securities, including publicly traded partnerships like UNG.

Since the IRA receives the Schedule K-1, the custodian managing the account is responsible for any necessary tax reporting, not the individual investor. Custodians typically handle compliance matters, ensuring required filings are completed. Investors do not need to enter K-1 data on their personal tax returns unless they take distributions from the IRA, at which point standard withdrawal rules apply.

Even though most income inside an IRA does not require reporting, investors should still review K-1 forms for accuracy. Errors in tax reporting can affect future transactions, such as rollovers or conversions. Keeping proper documentation and understanding tax treatment within an IRA can help prevent issues when funds are withdrawn.

Unrelated Business Taxable Income

While most income within an IRA is tax-deferred or tax-exempt, certain earnings can trigger immediate tax liability. One such category is Unrelated Business Taxable Income (UBTI), which applies when an IRA invests in partnerships like UNG. If UBTI exceeds a specific threshold, the IRA may be required to file a tax return and pay taxes.

Gains

When an IRA holds an interest in a publicly traded partnership, any income classified as UBTI is taxable. Gains from the sale of UNG units can sometimes be considered UBTI if they arise from business operations rather than passive investment income. The IRS defines UBTI under Section 512 of the Internal Revenue Code, generally including income from an active trade or business unrelated to the IRA’s tax-exempt purpose.

If UNG generates income from commodity-related activities classified as an active business, a portion of the gains allocated to IRA investors could be UBTI. If an IRA sells its UNG holdings at a profit, the gain itself is usually not UBTI unless it is tied to debt-financed income—meaning the IRA used borrowed funds to acquire the investment. In such cases, the portion of the gain attributable to the debt-financed portion of the investment may be taxable.

If UBTI from gains exceeds $1,000 in a tax year, the IRA must file Form 990-T and pay tax on the excess. The tax rate follows the trust tax brackets, which are highly compressed, meaning income above $14,450 (as of 2024) is taxed at 37%. Investors should monitor their K-1 forms for UBTI-related gains and consult their IRA custodian to determine if a filing is necessary.

Losses

Losses from UNG may also be reported on a K-1, but their treatment within an IRA differs from taxable accounts. While taxable investors can use partnership losses to offset other income, IRAs cannot. Losses classified as UBTI can only offset UBTI from the same or future years.

For example, if an IRA receives a K-1 from UNG showing a $500 UBTI loss in one year, that loss cannot offset capital gains or dividends from other investments within the account. Instead, it can only be carried forward to offset future UBTI. If an IRA fully liquidates its position in UNG and no longer holds any UBTI-generating investments, any remaining UBTI losses may be forfeited. Unlike taxable accounts where capital losses can be carried forward indefinitely, UBTI losses within an IRA are only useful if there is future UBTI to offset.

Thresholds

The IRS requires an IRA to file Form 990-T if total UBTI exceeds $1,000 in a tax year. This threshold applies to the aggregate UBTI from all investments within the IRA, not just from a single partnership like UNG.

For example, if an IRA holds UNG and another publicly traded partnership, and each generates $600 in UBTI, the total UBTI for the year would be $1,200. Since this exceeds the $1,000 threshold, the IRA must file Form 990-T and pay tax on the $200 excess. The tax is calculated using trust tax brackets, which escalate quickly, with rates reaching 37% at relatively low income levels.

IRA custodians typically handle the filing of Form 990-T, but investors should verify whether their custodian provides this service. Some custodians charge additional fees for processing UBTI-related filings, which can reduce overall returns. If an IRA consistently generates UBTI above the threshold, investors may want to reconsider holding partnerships like UNG in their retirement accounts to avoid ongoing tax compliance costs.

Allocation of Income and Deductions

Income and deductions in a publicly traded partnership like UNG are allocated based on ownership percentage, which can fluctuate due to contributions, withdrawals, or changes in the partnership structure.

Partnerships may use special allocations under Section 704(b) of the Internal Revenue Code, allowing income and deductions to be assigned in a way that may not be strictly proportional to ownership percentages. For example, if UNG incurs significant operational expenses, a larger portion of deductions may be allocated to certain unit holders, potentially altering their taxable income.

Timing also affects allocation, as partnerships must account for when an investor entered or exited the fund. The IRS permits two primary methods for prorating income: the interim closing method, which treats each investor’s holding period separately, and the proration method, which spreads income evenly across the year. Investors who buy or sell UNG units mid-year may see their allocations vary significantly depending on the method used.

State Filing Requirements

Beyond federal tax considerations, investors holding UNG in an IRA should be aware of potential state-level filing obligations. Publicly traded partnerships like UNG often conduct business in multiple states, resulting in income being allocated across various jurisdictions.

While IRAs are generally exempt from state income taxes, some states require filings if the partnership generates income within their borders. For example, California requires tax filings for tax-exempt entities if income sourced to the state exceeds $1,000. Other states, including New York and New Jersey, have similar rules that trigger reporting requirements based on allocated income.

Investors should review the state-specific information included in their K-1 package, as partnerships typically provide details on where income was earned and whether state filings may be necessary. While IRA custodians handle federal tax compliance, they may not assist with state-level filings, leaving investors responsible for determining their obligations. Consulting a tax professional can help clarify whether any action is required, particularly for those holding UNG in states with strict tax enforcement policies.