MLP and Energy holdings

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Josh5000
Posts: 150
Joined: Sat Mar 02, 2024 3:51 pm

MLP and Energy holdings

Post by Josh5000 »

Dear Community,

Anyone here holding energy? Unfortunately, my energy holding is in taxable so I can't take advantage of the recent runup without looking at 60% more in taxes against short term capital gain.

Had anyone run a spreadsheet to see the risks and rewards of short-term gain to redeploy capitals toward other depressed but ready to run sectors? Being in upper 24% tax bracket and pushing 32%, it is not easy to pay 24% instead of 15%. However, the ability to redeploy capitals without time constraint is great.

In addition, had anyone sell MLPs for long term capital gains. I understand the ROC and cost basis adjustment but my understanding is that long term capital gain is still possible for the gain longer than 12 months. For example, if an MLP bought for $100 in 2022 has a cost basis of $95 in 2023 and sold for $105 in 2024 then a portion of capital gain above $95 is treated as long term while another portion against a 2024 (current) cost basis of $90 is taxed at ordinary income. However, I can't tell what is that mixture. While MLPs are meant to hold for pass-through benefit, energy sectors are cyclical and one shouldn't knowingly hold a bag of gold while sitting in a sinking ship with no rescue in sight.
Exchme
Posts: 1355
Joined: Sun Sep 06, 2020 3:00 pm

Re: MLP and Energy holdings

Post by Exchme »

You walked into an AA meeting and shouted "How about a drink?!".

The site is dedicated to John Bogle's (late CEO of Vanguard) philosophy of buy a broad index fund and hold it forever. Not doing what you are trying to do of outguess all the other players in the market. It has advantages of very low cost, high tax efficiency and no need to be the smartest player in the market to make money.
gougou
Posts: 1342
Joined: Thu Sep 28, 2017 7:42 pm

Re: MLP and Energy holdings

Post by gougou »

I hold a lot of energy stocks and MLPs. But I was only forced to sell one of my MLPs (PBFX) for STCG when it was acquired so I don't have experience selling for LTCG. I plan to sell in the future when I've stopped working and moved to a place with lower taxes.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Torino
Posts: 39
Joined: Thu Mar 11, 2021 6:59 pm

Re: MLP and Energy holdings

Post by Torino »

When you sell a MLP, the final K1 will consist of the following:

1. Cumulative Adjustments to Basis
This will flow to form 8949 - capital gains and losses. you will need to adjust your brokerage provided cost basis by the adjustment amounts on the final K1.

2. Ordinary Gain/Loss - This is your depreciation recapture.
This will flow to form 4797- sale of business property and Schedule 1 (additional income) and will be taxed at ordinary rates.
You will not know how much the depreciation recapture is until you receive your final K1, however for many MLPs (but not all) it will be a significant percentage of all your annual distributions received.

3. You will also possibly have a passive loss on Schedule E that becomes available. You will need to track prior year passive losses and gains to determine the value available.

Also many (nearly half) of states do not allow federal bonus depreciation. This adds additional depreciation recapture at the state level,

MLPs become very complicated when you sell.

MMP - Magellan Midstream sold itself last year and forced many to take a tax hit.

Keep it simple with a Boglehead approach to investing. You will be ahead in the long run.
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