MLP 1099-B and K-1 — Why Your Broker's Cost Basis Is Wrong (and How to Fix It)

You sold units of a master limited partnership — Energy Transfer, Enterprise Products, MPLX, one of the pipeline names — and now you're holding two documents that don't agree. Your broker's 1099-B reports the sale with a cost basis. Then a Schedule K-1 arrives months later with a "sales schedule" showing a completely different basis and something ominously labeled "ordinary gain." Which one is right?

The K-1 is right, and the 1099-B is almost always wrong. MLPs are partnerships, not corporations, and that changes everything about how your cost basis works. Your broker tracks basis like a stock, but partnership tax rules constantly adjust it — down for distributions, up for allocated income — and part of your gain gets taxed as ordinary income instead of capital gain. If you just enter the 1099-B as-is, you'll report the wrong gain and file the wrong forms. This guide untangles the MLP reporting mess.

Why an MLP Isn't Like a Stock

When you own MLP units, you're a limited partner, not a shareholder. That means:

• You receive a Schedule K-1 each year reporting your share of the partnership's income, deductions, and credits — whether or not you sold anything.
• Your cost basis changes every year, even if you do nothing: it decreases by the cash distributions you receive and increases by the income allocated to you on the K-1.
• The generous "distributions" MLPs are famous for are largely return of capital — they're not taxed as dividends, but they lower your basis, which is what eventually creates a big taxable gain when you sell.

Your broker's 1099-B can't see any of this. It tracks your original purchase price like a stock and never applies the partnership adjustments — so its cost basis figure is stale from day one.

The K-1 Sales Schedule Is Your Source of Truth

When you sell MLP units, the K-1 package includes a "Sales Schedule" (sometimes called a basis or gain worksheet). This is the single most important document for reporting the sale correctly. It gives you:

1. Your adjusted cost basis — original cost, minus cumulative distributions, plus cumulative allocated income. This is your real basis, and it's usually far lower than what the 1099-B shows (which is why MLP sales often produce a large gain).
2. An ordinary gain amount (the "Section 751" or "gain subject to recapture" column). This is the portion of your gain that must be taxed as ordinary income, not capital gain — it represents depreciation and other items recaptured on sale.

You reconcile the broker's numbers to the K-1's numbers. The proceeds should match; the basis and the character of the gain will not.

Step-by-Step: Reporting an MLP Sale

Here's the reconciliation, in order:

1. Start with the 1099-B proceeds. Those are correct — the sale amount matches.
2. Replace the broker's basis with the K-1 adjusted basis. The 1099-B basis is wrong; use the sales schedule's adjusted basis figure.
3. Split the gain into ordinary and capital pieces. The K-1 sales schedule shows the ordinary gain (Section 751 recapture). That amount goes on Form 4797, Part II as ordinary income.
4. Report the remaining capital gain on Form 8949. Use the proceeds and the adjusted basis, and apply an adjustment so you don't double-count the ordinary portion — typically adjustment code B (incorrect basis reported) plus a note, following our Form 8949 adjustment codes reference.

The net effect: part of your profit is taxed at ordinary rates (Form 4797), and the rest at capital gains rates (Schedule D via Form 8949). The 1099-B alone would have missed both the basis adjustment and the ordinary split.

Why the 1099-B Basis Is Usually Too High

The math almost always runs the same direction. Over years of ownership, MLP distributions steadily reduce your basis. Say you bought units for $30,000 and collected $12,000 in return-of-capital distributions over a decade — your adjusted basis is now roughly $18,000 (before income allocations). But the 1099-B may still show $30,000. Sell for $32,000 and:

• Broker's version: $32,000 − $30,000 = $2,000 gain.
• Correct version: $32,000 − ~$18,000 = ~$14,000 gain, part of it ordinary.

Trusting the 1099-B would understate your gain here — the opposite of the usual noncovered-basis problem, and a fast way to draw an IRS notice when the K-1 data doesn't match your return. As with any security where the broker's basis is wrong, you correct it on your own forms.

Timing Headache: K-1s Arrive Late

MLP K-1s are notorious for arriving in March or even April, long after your 1099-B. If you file early using only the 1099-B, you'll almost certainly file wrong and have to amend. The practical advice for MLP investors: wait for the K-1 (or file an extension) before finalizing a year in which you sold units. Trying to shortcut the K-1 is the single most common MLP filing mistake.

FAQ

Why doesn't my MLP 1099-B match the K-1?

Because MLPs are partnerships. Your basis is adjusted every year by distributions (down) and allocated income (up), which the broker's 1099-B doesn't track. The K-1 sales schedule shows the correct adjusted basis.

Which document should I use for my MLP cost basis — the 1099-B or the K-1?

The K-1 sales schedule. It reflects the partnership basis adjustments the broker can't see. The 1099-B is reliable only for the proceeds figure.

What is the ordinary gain on an MLP sale?

Part of your gain — the Section 751 "recapture" amount shown on the K-1 sales schedule — is taxed as ordinary income rather than capital gain. It goes on Form 4797, Part II.

Why is my MLP gain so much bigger than I expected?

Years of return-of-capital distributions lowered your cost basis. A lower basis means a larger gain on sale, even if the units barely rose in price. This is normal for long-held MLPs.

Do I report an MLP sale on Form 8949 or Form 4797?

Both. The ordinary (Section 751) portion goes on Form 4797; the remaining capital gain goes on Form 8949 and Schedule D using the K-1 adjusted basis.

Should I wait for the K-1 before filing?

Yes, if you sold units. K-1s arrive late (March–April) and carry the basis and ordinary-gain data you need. Filing early on the 1099-B alone usually forces an amended return.

Bottom Line

An MLP isn't a stock, and its 1099-B can't be trusted for cost basis. Partnership rules quietly adjust your basis every year — mostly downward through return-of-capital distributions — and split your eventual gain into an ordinary piece and a capital piece. The K-1 sales schedule is the document that gets it right.

Match the proceeds, swap in the K-1 adjusted basis, route the ordinary gain to Form 4797 and the rest to Form 8949, and wait for that late-arriving K-1 before you file. Do that, and you'll report the real number instead of the broker's fiction.

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