Electronic K-1s To Relieve Tax Headaches

January 09, 2013

Electronic tax forms are on the way for ETF investors using futures, and it’s about time.

As any futures-based commodities investor knows, one of the main drawbacks to ETFs structured as commodities pools is dealing with K-1 tax forms. But relief appears to be on the way.

In the next few days, ALPS will be sending out an email blast to 50,000 RIAs discussing the advent of the so-called electronic K-1. While this may not be on par with landing on the moon or the splitting of an atom, it is a landmark event in the commodity ETF industry, which could boost asset gathering.

About $17 billion is invested in limited partnerships, the lone ETP structure that requires the receipt of a K-1. That’s just 15 percent of the $120 billion invested in commodity ETPs and not even one-fourth of the $71 billion in the bullion fund SPDR Gold Shares (NYSEArca: GLD). Most of the assets are in grantor trusts and ETNs, two tax structures with very straightforward tax treatments.

But lest you think what’s at stake is peanuts, some futures-based funds that get saddled with K-1s have billions in assets.

I’m referring to large funds such as the $6.7 billion PowerShares DB Commodity Tracking Fund (NYSEArca: DBC) and the $1.63 billion PowerShares DB Agriculture Fund (NYSEArca: DBA). In other words, a lot of commodities investors out there will care about this.

I’d venture to guess that that total may be about to ramp up, as more widespread adoption of electronic K-1s starts to take hold.

That’s because one of the biggest investor objections to the K-1—the fact that the document didn’t arrive until very late on the tax calendar—will be taken off the table.

At the end of the day, that fact alone turned many investors away from the structure, sending them to the straightforward structure of an ETN, for example, even if they had to make peace with the credit risk that’s at the center of that structure.

It’s hard enough to get your taxes done by April 15 every year, let alone when you have a critical piece of your taxable pie that arrives a week ahead of your drop-dead date.



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