Commodity ETFs typically generate a schedule K-1 instead of a 1099 form.
K-1s may bring to mind late tax forms and/or problematic types of income like UBTI, but these don't occur with most commodity ETFs.
Helpful information for investors who hold or are considering commodity ETFs.
A K-1 is a tax form on which certain type of trusts and partnerships will report the shareholder's share of the entity's income over the past year. One of the most common situations in which an exchange-traded fund will generate a K-1 is when the ETF invests in commodity futures contracts. You will get a K-1 for the ETF instead of seeing the income on a 1099 form. (ETFs that invest directly in the hard commodity itself, such as some gold ETFs, do not generate K-1s for their shareholders.)
Some investors worry when they hear that their commodity ETF will generate a K-1. There are two main reasons for concern.
- First, some entities that generate K-1s have a history of sending out their K-1s after April 15, which can complicate matters for shareholders at tax time.
- Second, some entities that generate K-1s (such as certain real-estate partnerships), can generate income known as Unrelated Business Taxable Income, or UBTI. This type of income is taxable even if you hold the investment inside a tax-advantaged account, which is naturally a concern for IRA investors.
Fortunately, the straightforward commodity ETFs of interest to most investors have a history of sending K-1 statements in a timely manner (no later than March), and don't generate UBTI. This is not to say that these ETFs could never have such issues in the future, but they have not had them in the past. Commodity ETFs that use leverage, on the other hand, should be viewed with more caution.
Concerns about K-1 statements from plain-vanilla ETFs that invest in commodity futures contracts should generally not be a reason to avoid these investments, assuming they otherwise make sense for your portfolio. A K-1 is just a different tax reporting form, and not necessarily cause for alarm.