Education - Member Q&A

This website offers three (3) user-driven Question & Answer features. One is exclusively focused on questions related to our flagship newsletter product and only for subscribers. The FAQ (Frequently Asked Questions) feature also available in the Education menu is mostly for website use and general customer service questions. But THIS one is for ALL followers -- subscribers or not -- and is focused on investor-driven educational topics.


Our followers ask questions. We differ from many competitors by LISTENING and trying to answer up to every question. Sometimes the answers are better suited for delivery in an existing or future special report, webinar of investing insight topic. Sometimes the questions better fit in one of the other Q&A features. However, when we are asked a question that -- if answered well (which is the only way we do it) -- will be of interest to our followers as a whole, it very well may be posted here as soon as we can. Below find a batch of recently-asked questions and well-developed, all-original answers. Click the question bar to reveal the answer. Click another question bar to close one question and open another. 


What do ETF investors need to know about K-1 tax forms?

Should five percent appear too small

Be thankful I don't take it all

'Cause I'm the taxman

Yeah, I'm the taxman

(If you drive a car, car) I'll tax the street

(If you try to sit, sit) I'll tax your seat

(If you get too cold, cold) I'll tax the heat

(If you take a walk, walk) I'll tax your feet

— “Taxman” by The Beatles



Taxes. Always a fun topic.

After being forced to pay a huge percentage of your annual income to the taxman, you are then taxed on your spending. Then when you successfully invest what little you have remaining, you get taxed on that too. And the taxman doesn’t just take your money against your will. He also makes it very complicated and time-consuming to figure out exactly how much you will be forced to give him. Such is the plight of an investor in our times.


What Is A K-1?

One of the more complex tax forms is a Schedule K-1 tax form. It is similar to a Form 1099, since it reports dividends, interest and other income from investments.

Most exchange-traded funds (ETFs) do not issue K-1s, but master limited partnerships (MLPs) and many commodity, currency and volatility ETFs that invest in futures contracts are legally structured as partnerships and must issue K-1s.

ETFs structured as partnerships do not typically pay federal taxes directly. Instead, they pass through their income and gains/losses directly to the individual investors or “partners”. They must send a K-1 to the investors each year detailing their financial interest in the partnership.

If you invest in an ETF that issues a K-1 tax form, you (or your tax preparer) are required to use the information on the form to fill out your tax return.


One K-1 ETF Positive

One positive of K-1 ETFs is they can generate lower taxes for short-term traders. Capital gains on K-1 ETFs are taxed at lower long-term capital gains rates for 60% of the gain and higher short-term capital gain rates for 40% of the gain, regardless of the holding period. Thus, instead of being taxed entirely at the higher short-term capital gains rate, short-term traders benefit from having 60% of their gains being taxed at the lower long-term capital gains rate.


K-1 ETF Negatives

One problem with K-1 forms is they typically arrive late in the tax season, usually around March 15, which can sometimes delay the filing of a tax return.

Another problem is you may have to pay taxes on income generated by the ETF, even if you didn’t sell the shares.

And if you own a K-1 ETF in a “tax-free” account such as an IRA, you may have to pay taxes on it! This can happen if there is income that is treated as Unrelated Business Taxable Income or UBTI. If the total UBTI for all investments in your IRA exceeds $1,000, then you will have to prepare Form 990-T for your IRA custodian for filing and pay taxes on that income. Many IRA custodians (including popular online brokers) will take care of this for you. Importantly, some K-1 ETFs have a history and goal of avoiding UBTI, such as those issued by ProShares, so it is wise to seek those out.


No K-1 ETFs

There are some commodity ETFs that do not issue K-1s. For example, a broad commodity no K-1 ETF is Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (ticker: PDBC), which is essentially the same as the K-1 issuing Invesco DB Commodity Index Tracking Fund (ticker: DBC).

A no K-1 oil ETF is ProShares K-1 Free Crude Oil Strategy ETF (ticker: OILK; red line in chart below), which performs similarly to the K-1 issuing United States Oil Fund (ticker: USO; black line in chart below), as shown below.


USO OILK​​​​​​​


However, in some cases there are no alternatives, such as with currency, volatility and levered and inverse commodity ETFs.


Conclusion

Like taxes in general, K-1s can be an expensive hassle that harms your goal of accumulating wealth.

Our recommendations with regard to K-1 ETFs are:

  • Try to find no-K1 ETF alternatives, whenever possible
  • If you do invest in an ETF with a K-1, try to do so in a tax-free account such as an IRA; also, try to find ones that are unlikely to have UBTI
  • If in doubt, as with all things tax-related, consult a professional tax advisor
  • Lastly, encourage politicians to eliminate Schedule K-1 requirements; or better yet, encourage them to eliminate all taxes on savings and investments, which would create higher living standards for everyone




We discuss how to create wealth despite government taxation and inflation in our FREE Special Report entitled “WHY YOU SHOULD INVEST FOR BULL AND BEAR PROFITS”.


What caused the current high inflation and what did the Fed do wrong?

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What does the European energy crisis mean for investors?

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What do you think about investing in Gold Mining stocks now?

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Do you think Bitcoin is likely to fall to new lows?

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What is Quantitative Tightening and how will it impact financial markets?

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What are the best and worst stock sectors in a bear market?

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How have your forecasts worked out over the past year? (Part 2)

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How have your forecasts worked out over the past year? (Part 1)

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How can you use volume as a technical indicator for investing?

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What problems are caused when banks create money out of thin air?

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Are dividend growth funds a good long-term investment at the moment?

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What do you think of Yellen’s comments that we will not have a recession?

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Do stocks always outperform T-bills and inflation in the long run?

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Are inverse ETFs worth considering as investment vehicles?

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Any thoughts on Bernanke’s recent inflation and recession comments?

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Is Bitcoin or gold a better inflation hedge now?

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Does the negative GDP report mean we’re already in a recession?

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Will the next bear market be one big disaster or a series of crises? And what will the Fed do about it?

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Is the Fed really trying to crash the housing, bond and stock markets?

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Given inflation and bear market risks and opportunities, how can those of us with 401k retirement accounts invest, given our limited alternatives?

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What is different between now and the 2020 stock market crash?

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In your “Stocks & Commodities” article, there were 4 times since 2009 that met your “sell short” criteria but were not major bear markets. Thoughts?

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Inverse ETFs providers say the holding period should be no longer than a single day. How long do you hold these?

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What are credit markets telling us now about stocks and ETFs?

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What impact will the Russia/Ukraine war have and is the stock market correction over?

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How are major ETF asset classes looking on your Trend and Trade analysis?

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What does the latest inflation report mean for interest rates and the economy?

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Is the stock market rally over?

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What do your measures of stock market sentiment and internals tell us about the outlook for stocks and ETFs?

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What are technical trend lines telling us now about stocks and ETFs?

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Is it better to invest in Growth or Value stocks now?

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What is the best indicator to determine if a stock or ETF is “overbought” or “oversold”?

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What can the “Santa Claus rally” and “January Barometer” tell us about the outlook for the stock market in 2022?

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How will the latest Fed announcement to fight inflation impact stocks and ETFs?

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What is the VIX, why is it important and what is it telling us now?

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How will new Covid variants impact the economy and stock market?

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What do you think about investing in TIPS versus traditional Treasury bond ETFs given high inflation?

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What are the implications of high inflation for stocks, ETFs and the economy?

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Are we in another housing bubble?

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Why is EPS growth so important in stock investing?

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What can stock and ETF investors learn from the fact that Japan’s stock market is still well below its highs of 30+ years ago?

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Do you think the economy is heading towards “stagflation”?

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Your MarketWatch.com interview seemed very bearish. Are there any stocks or ETFs you recommend buying right now?

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Shouldn’t stock and ETF investors focus on current money supply growth, since it drives the economy and stock market?

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Why shouldn't investors just follow the simple Wall Street rule of “don’t fight the Fed”?

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How can you make money — instead of lose money — in a major bear market with ETFs?

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How important is stock market seasonality for stock and ETF investors, particularly in September and October?

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How concerned should stock and ETF investors be about margin debt levels?

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Are US Treasury Bond ETFs safe long-term investments?

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What are the key characteristics of winning stocks?

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What are the best and worst trending stock sector ETFs right now?

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What is the likelihood the next bear market and recession will be even worse than the Great Recession of 2008-2009?

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What impact will the US government’s stimulus package have on the economy and stocks?

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I've never invested before in my life. How do I start?

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How do you place a GTC and T-Stop order?

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What is wrong with a “buy and hold” or “asset allocation” investment strategy?

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Why is it so important to keep investment costs low on stocks and ETFs and how can that be done?

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What is the best way to invest to retire early?

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What are the best ways for investors to profit from stock bear markets, such as the 2008-2009 Global Financial Crisis?

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What are the historical long-term returns of stocks, bonds, bills, REITs, housing, gold, commodities and inflation?

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How can technical analysis be helpful to profit from bull and bear markets in stocks and ETFs?

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What is the primary cause of bull and bear markets in stocks and ETFs?

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How do you use economic indicators to determine the outlook for the economy, stocks and ETFs?

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How can you estimate the long-term returns of stocks, bonds, REITs and other financial assets?

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A CALL FOR MORE QUESTIONS

If you have a good question likely to be of interest to Bull And Bear Profits followers as a group, first check to see if the topic might be covered in any of the other educational features. If not or if you are unsure, don't be shy about scrolling back up to the top right of this page and clicking the orange "Ask a Question" button to submit a new one.


We try to cover EVERY single topic asked ASAP as long as it likely to be or broad interest to our followers as a group. As a publisher and not an investing advisor, we are not allowed to offer individualized advice specific to any one person. 


This Member Q&A feature is focused on investor education. We also have a separate Frequently Asked Questions section for customer service and website usage questions. Special Reports, Webinars and regularly-posted, Investing Insights are all places where many questions are covered in depth. And our own Stock & ETF Education Course covers rich information for less-to-moderately-experienced investors and traders too.


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