What Is a UCO K-1 and How Does It Affect Your Taxes?

If you’ve received a UCO K-1 form, you might wonder what it is and how it affects your taxes. Unlike 1099 forms, which report straightforward income like dividends or interest, a K-1 details more complex financial information that must be included on your return. Understanding its impact is key to avoiding errors and IRS scrutiny.

Purpose of UCO K-1 Data

The UCO K-1 form is issued to investors in the ProShares Ultra Bloomberg Crude Oil (UCO) exchange-traded fund (ETF), which is structured as a partnership for tax purposes. Unlike traditional ETFs that distribute Form 1099, UCO’s partnership status means investors are considered limited partners, requiring a Schedule K-1 to report their share of the fund’s taxable activity.

UCO primarily invests in crude oil futures contracts, subject to mark-to-market rules under Section 1256 of the Internal Revenue Code. Gains and losses are treated as 60% long-term and 40% short-term, regardless of how long the contracts were held. This blended tax treatment often results in a lower effective tax rate compared to ordinary short-term capital gains, which are taxed at an investor’s marginal rate.

Beyond capital gains and losses, the K-1 reports other financial details, such as interest income, expenses, and tax preference items. These allocations are based on an investor’s proportional ownership in the fund, which can fluctuate throughout the year. Because UCO’s portfolio is actively managed, reported figures may vary significantly, requiring careful review for accurate tax reporting.

Categories of Income and Deductions

The UCO K-1 reports various types of income and deductions that impact an investor’s tax liability. A key component is ordinary business income or loss, reported on Line 1. This represents the fund’s net earnings from trading and is taxable even if no cash distribution was received. Unlike capital gains, this income is not subject to self-employment tax for UCO investors.

Another major category is Section 1256 contract income, resulting from UCO’s trading in crude oil futures. These contracts follow a unique tax treatment where gains and losses are marked to market at year-end and split into 60% long-term and 40% short-term capital gains. This can benefit investors in higher tax brackets by offering a lower tax rate compared to ordinary short-term capital gains.

The K-1 also includes deductions such as management fees and trading costs, reducing taxable earnings. These expenses are reported separately and may be subject to limitations based on an investor’s tax situation. If the fund incurs borrowing costs, interest expense may be allocated. While these deductions lower taxable income, they must comply with IRS rules.

Reporting on Personal Returns

Filing taxes with a UCO K-1 requires careful integration of the reported figures into an individual tax return. Since a partnership does not pay taxes itself, income, deductions, and credits flow through to investors.

For most, amounts from the K-1 are reported on Schedule E (Supplemental Income and Loss), used for partnerships and other pass-through entities. Capital gains must be reported on Schedule D (Capital Gains and Losses) and Form 8949, which details individual transactions. If the K-1 includes investment interest expense, it may need to be reported on Form 4952 to determine the deductible amount.

Passive activity rules can also affect how income or losses from UCO are handled. Most investors in publicly traded partnerships (PTPs) are considered passive participants, meaning losses on the K-1 may be subject to passive loss limitations under Section 469 of the Internal Revenue Code. Typically, these losses can only be deducted against other passive income. If there is insufficient passive income, the losses may be carried forward until they can be applied.

State Filing Considerations

State tax reporting for a UCO K-1 can be more complex than federal filing due to varying rules on partnership income and multi-state tax obligations. Since UCO operates as a publicly traded partnership, it may generate taxable income in multiple states, potentially requiring investors to file returns in jurisdictions where they do not reside.

Each state has its own approach to taxing partnership income. Some require nonresident investors to file a return if their income sourced to that state exceeds a certain threshold. For example, California generally requires a nonresident return if income exceeds $1,000, while other states set different limits.

Some states impose withholding taxes on nonresident partners, meaning UCO may withhold a portion of an investor’s income for state tax purposes. This withholding is reported on the K-1 and can typically be claimed as a credit when filing a state return. However, not all states allow a full credit for taxes paid to other jurisdictions, which can lead to double taxation if not properly managed. For instance, New York residents may receive a credit for taxes paid to other states, but the calculation depends on specific sourcing rules.

Allocation Adjustments or Amendments

Figures reported on a UCO K-1 are subject to adjustments, which may result from corrections to the fund’s financial records, changes in partnership allocations, or IRS-mandated modifications. Since UCO’s income is derived from actively traded futures contracts, discrepancies can arise in the reporting process, leading to amended K-1s being issued after the initial tax filing deadline.

If an amended K-1 is received, taxpayers may need to file an amended return using Form 1040-X. The impact depends on the adjustment. Additional taxable income could increase tax liability, potentially triggering interest and penalties. If the amendment results in lower taxable income, a refund may be available. Investors should review changes carefully and consult a tax professional if necessary, especially if the adjustments affect multiple years or state filings.

Timing for K-1 Distribution

Unlike Form 1099, which is typically issued by late January, Schedule K-1 forms are often distributed later due to the complexity of partnership accounting. UCO investors can expect to receive their K-1s between mid-March and early April, though delays are not uncommon. Since partnerships must finalize their tax filings before issuing K-1s, any internal review or adjustments can push back the timeline.

This later issuance can be challenging for taxpayers who prefer to file early. Those expecting a K-1 should consider delaying their tax return submission until the document is received to avoid amendments. If an extension is necessary, filing Form 4868 grants an automatic six-month extension, moving the deadline to mid-October. However, an extension only delays the filing requirement, not the payment of any taxes owed, so estimated payments may still be required to avoid penalties.