Help with Schedule K-1, 1099-B and Section 1256 Gains for commodity futures - double taxation?

This is actually a common issue with publicly traded partnerships (PTPs) that deal with futures contracts. Let me clarify what's happening: When you own USO, you're not directly owning Section 1256 contracts - you own partnership interests in an entity that trades those contracts. The partnership (USO) is the one directly holding the Section 1256 contracts. The Schedule K-1 reports your share of the partnership's trading activities, including the Section 1256 gains that get the 60/40 treatment. This is correct and reflects your portion of what happens INSIDE the partnership. The 1099-B from Fidelity is reporting the sale of your partnership interest itself, which is a separate transaction from the partnership's internal trading activities. The partnership interest is treated as a capital asset, not as a Section 1256 contract. So Fidelity is correct in their reporting. You're not being double-taxed because you're dealing with two different assets: 1) your share of the partnership's Section 1256 transactions (via K-1) and 2) the partnership interest itself (via 1099-B). You should report both transactions, but you may need to adjust your basis on the 1099-B sale using Form 8949 to account for previously taxed income reported on your K-1s.

After dealing with a similar commodity futures partnership nightmare last year, I finally found an amazing solution through taxr.ai (https://taxr.ai). I was also getting conflicting info about Schedule K-1s, Section 1256 gains, and broker statements. The taxr.ai system analyzed my Schedule K-1 and 1099-B forms, spotted the exact issue you're describing, and explained exactly how to handle the basis adjustments. They clarified that I needed to track my "outside basis" in the partnership separate from what's reported on my 1099. Their system flagged the potential double taxation issue before I even asked about it and provided step-by-step instructions specifically for USO and similar partnerships. It saved me hours of research and probably thousands in potential tax overpayment.

Just wanted to follow up after trying taxr.ai like you suggested. Wow! I uploaded my partnership K-1s and 1099-B, and it immediately identified the exact issue with my commodity futures partnership. The system calculated my adjusted basis, accounting for the Section 1256 gains I'd already reported in previous years. It showed exactly where the potential double taxation would occur and created a completed Form 8949 with the proper basis adjustments and code B for my tax return. What really helped was their specific explanation about how publicly traded partnerships like USO that deal with Section 1256 contracts create this unusual tax situation. Their documentation explained why both Fidelity's 1099-B reporting AND the K-1 Section 1256 treatment were correct, but needed to be reconciled. My tax bill ended up being about $2,300 lower than what it would have been if I'd just blindly followed the 1099-B without adjustments!

If you're still struggling with getting help from the IRS on this Section 1256/K-1 issue, I strongly recommend checking out Claimyr (https://claimyr.com). I was in the same boat - stuck between conflicting info from my broker and the partnership, and couldn't get anyone at the IRS on the phone for weeks. I was skeptical, but Claimyr got me connected to an actual IRS agent in less than 20 minutes who was knowledgeable about partnership basis issues and Section 1256 contracts. You can see how it works in their demo: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what to do with Form 8949 and the basis adjustments, and even explained how to document everything properly in case of an audit. No more guessing about whether I was handling this correctly!

I need to follow up about Claimyr after my skeptical comment. I decided to try it as a last resort for my Section 1256 partnership mess, and I'm honestly shocked it worked. After failing to reach anyone at the IRS for two weeks, Claimyr got me connected to an IRS tax law specialist in about 25 minutes. The agent walked me through exactly how to handle the Schedule K-1 Section 1256 gains versus the 1099-B reporting of the partnership sale. She confirmed I needed to use Form 8949 with adjustment code B to increase my basis by the amount of partnership income I'd already been taxed on through the K-1s. She also explained that the broker is correct in how they reported the sale - it's not their job to track my basis adjustments from partnership activities. Can't believe I wasted so many hours on hold before finding this. If you're stuck on complex partnership tax issues like Section 1256 treatments, actually speaking to a knowledgeable IRS agent makes all the difference.

One thing nobody's mentioned yet that's really important: You also need to consider if you received any cash distributions from USO during the time you held it. Those distributions would have reduced your basis in the partnership interest. The full calculation for your adjusted basis would be: Original purchase price + Income reported on K-1s (including Section 1256 gains) - Losses reported on K-1s - Distributions received If distributions exceeded your basis at any point, you would have had to recognize gain in that year. This gets complicated fast with publicly traded partnerships like USO.

I got audited last year on this exact issue with a different commodity futures partnership! My advice: keep EXTREMELY detailed records of your basis adjustments. The IRS computer system often flags returns where the basis reported on Form 8949 differs significantly from what's on the 1099-B, even when you use the adjustment codes correctly. The auditor initially thought I was trying to avoid taxes until I showed my spreadsheet tracking each year's: - K-1 income by category (especially Section 1256 gains) - Distributions received - Basis adjustments calculated - Supporting documentation After reviewing everything, the auditor agreed my calculations were correct. But save yourself the headache and document EVERYTHING about your basis calculations!

Based on everyone's helpful responses, I want to add one more critical point that saved me significant time and potential errors: always request the "Partnership Basis Schedule" or "Outside Basis Statement" from the partnership if they provide one. Some partnerships like USO will provide a detailed basis tracking statement upon request that shows your cumulative basis adjustments from year to year. This can be incredibly helpful for complex situations involving multiple years of Section 1256 gains and distributions. If your partnership doesn't provide this, I highly recommend creating your own tracking spreadsheet starting from day one. Include columns for: - Beginning basis each year - K-1 income items (by line) - K-1 loss items (by line) - Distributions received - Ending basis This becomes invaluable when you sell, especially for partnerships with complex activities like commodity futures. It also provides clear documentation if you ever face an audit on the basis adjustments you report on Form 8949. The key is being proactive about tracking rather than trying to reconstruct everything when you sell years later!