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PowerShares DB Commodity Tracking ETF Message Board

  • r_elgee r_elgee May 15, 2009 10:27 AM Flag

    Bypass limited partnership tax problem

    By using in-the-money options, you can play DBC with only a fraction of the $ and no exposure to K-1 tax issues. Go out in options to say Jan 2010 or 2011. Look at the 18 strike (DOBAR)(or Jan 2011 15 VCZAO)...for approx $4600 with DOBAR you can control 10 contracts (1000shares). These deep in-the-money calls track almost dollar for dollar with the market with lower time premiums. If between now and expiration in Jan 2010 DBC goes up $1 you have the chance to close out the position with a $1000 profit. Great return for only $4600 investment. Of course 'do diligence' on any investment is essential...as losers are as plentiful as winners.
    Ray

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    • LLCs do not belong in accounts where tax efficiency is wanted for obvious reasons - the required annual pass-throughs generate unavoidable tax liability.

      UBIT only affects tax-exempt organizations. No market traded entity is that.

    • I would put this and all LLC's in a normal account and just deal with the K1 right upfront. Do not buy LLC's for your IRA! You might have to pay UBIT.

      Check it here:
      www.fool.com/taxes/2000/taxes000908.htm

    • When you cash in your IRA monies, it is all income. Who cares whether it is from a profit (capital gains) or a loss.

      Good reason to have this and those ETN's that deal only in futures contracts in your IRA.

    • What is meant is that in an IRA, when you make withdrawals, you are taxed ONLY on the amount of the withdrawal at your then current rate. Real simple, so at least your 80-year old brain won't be taxed.

      In a taxable acount, because DBC is a partnership, you are taxed on the partnership gains whether or not they are actually distributed and go into your pocket. Thus the partnership can have made $1.00 per share, distributed 50 cents and kept 50 cents in the partnership's account. You will be taxed on the full dollar though you have received only 50 cents of it.

      It is annoying to be taxed on the "phantom income," but in theory the net asset value of your share has gone up by 50 cents but the taxable "basis" of the share will also have gone up 50 cents so you will not be taxed again on the 50 cents when you sell the share. (Your broker should be able to tell you what your tax basis is at any time.)

      If you plan to become a millionaire in the future, funds like this make sense as you'll be paying taxes now on undistributed income at your lower current tax rates. Otherwise, the partnership setup can make you VERY unhappy on April 15.

    • I don't get it. You still have to pay taxes on the gains from the options trade. What's the tax advantage in a taxable account?

      • 2 Replies to vensh
      • Vensh. As you can see from my original post I did not mention anything about gains or losses. My comment was strictly about an alternative way to participate in DBC without having to deal with K-1 partnership issues. I, for one, believe commodities are the sweet spot for the foreseeable future and DBC looks to be a right mix. I also do my own taxes and don't like the complexity of limited partnership reporting. I'm playing this through deep in-the-money calls so all I have worry about is capital gains (or losses). If you don't mind tackling K-1 reporting on your taxes or have someone else doing your taxes, by all means own shares DBC.

      • Vensh
        True, you do report capital gains and losses. With limited partnerships under the guise of ETFs like DBC, UNG, etc. you run into other tax related problems (K1s). See the 13 Apr post "Question on DBC Tax Nightmare". I was in and out of UNG several times last year and received a K1 for each trade. I tried to get them to consolidate but they wouldn't. Plus because I held one for several months I had one K1 which reported some outlandish numbers related to a portion of the partnership's profit which I did not participate in. I think someone else experienced the same type of problem in the earlier post. With Ray's approach you bypass the limited partnership trap.
        Dan

    • Thanks Ray. Interesting concept. I was playing in UNG several times last year and got hit with the same limited partnership BS. Have wanted to get into DBC but didn't want the K1 hassle again. Will look into this more over the weekend and start tracking this for several stock and ETFs I might be interested in. Dan

 
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