d_teller

Commodity ETFs as Proxies for Private Money

The Revenue code, section 415, clearly lists collectibles may not be held (including bullion, art, jewelry, furs, stamps,etc) in an IRA or Chapter S setting, the exception being U.S. Treasury-issued coinage of gold and silver.

Perhaps the sponsors of GLD (and other commodity-holding ETFs, and some of the other commodity-linked ETFs, such as DBC) may have received a private letter ruling that transactions involving their marketed shares (not the creation units) aren't considered to be "Holding" of collectible commodities in a tax sheltered environment...BUT - if the originator of the index issues a K-1 to the IRA's owner via the account # of the IRA, and if the K-1 has a sum of >$1000, in section 20, code V (Unrelated Busines Taxable Income) then the tax-sheltered account must pay federal tax on that income (form 990t) or file a form 920t to show why its tax exempt staus should not be revoked.

What are the risks?.

The K-1 comes months after the 1099R from the brokerage; it is issued by the company that actually does the trading (Deutsche-Bank, not Powershares); it is possible that some or many commodity-linked ETFs will accumulate UBTI for an individual's sheltered accounts in excess of $1000.00 across all of the sheltered accounts for that individual; the payment of federal tax must be made by the IRA, not the individual, otherwise it will be deemed "an excess" or "delayed and disqualified excess contribution".

The same is true for GrantorTrusts, such as DBA, and for Publically Traded Partnerships, (and for these, the tax benefits of return of capital vs dividends, tax-loss carryforwards, etc., available in taxable accounts, are useless in tax-sheltered accounts, particularly for standard IRA's). The section 20 V on the K-1 is a hazard that can disqualify the tax shelter.

I wrote a comment in an earlier posting about the K-1 hazards for tax-sheltered accounts; particularly for the securities that already have a tax-shelter registration number, such as a PTP, and the IRS doesn't want to know that the commodity, or futures, or PTP had all kinds of income or costs in the IRA...only that UBTI is a serious hazard, particularly as it is reported later than a 1099, and directly from the index maker, not the brokerage, when it is too late to pay the Federal Tax on the IRA's UBTI, from the IRA's earnings or cash!.