There are actually several types of transactions that are covered by section 988.
For items that an individual has under section 988 these are often reported on Form 6781 because it is from a straddle or similar contract. See http://www.irs.gov/pub/irs-pdf/f6781.pdf
Unfortunately, most of the K-1, letters with the K-1 and notes do not give enough information to be certain exactly what is being listed on line 11.
When lacking guidance from the partnership as to whether or not this does belong on Form 6781 my usual form of reporting is to take all of these amounts as Other Income (line 21, Form 1040).
Even though the partnership is a passive activity, my understanding of these types of transactions are that the income is neither passive nor portfolio income (so Other Income is proper, and not subject to passive loss rules) for a partnership that is basically an investment vehicle for the partners.
"Sec. 988. Treatment of certain foreign currency transactions (a) General rule Notwithstanding any other provision of this chapter - (1) Treatment as ordinary income or loss (A) In general Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be). "
See also Reg. 1.469-1T(e)(6)(i), which says that "an activity of trading personal property for the account of the owners of interests in the activity is not a passive activity, regardless of whether the activity is a trade or business."
Hope this helps for deciding how to properly report these items or if you need more information from the partnership to make that decision.
Please ask if you need more discussion or clarification.
This k1 belongs to a partnership.....not an invididual...
Sorry I did not pick up on that. Nonetheless, the same principle applies.
This is neither portfolio income nor is it passive income.
So on the 1065 I would enter it as Other Income which is line 7 which will also flow and add to Schedule K line 11.
That should flow to the partners of that partnership as Other Income on K-1 line 11 and wind up on the individual line 21 of Form 1040.
Hope that clarifies for you.
IT seems like a gain/loss so can I put on a 4797? The other items in the same category hit the 4797.....Nothing hit the front of the 1065 except for the amounts of other income on the 4797
Not sure if you have a place to enter line 7 of Form 1065.
If you decide that is best, XXXXX XXXXX the information provided by the partnership, sure you can.
As previously stated this should usually be counted as ordinary income; so you may need to use Part I or enter on the 4797 to be ordinary.
The exception would be if you know these are from foreign currency contracts or future contracts, then you could use Form 6781 (but may not have enough information the program may require) and those are capital gains.
Since there is not always enough information there may be several legitimate entry points to get the K-1 to properly show the item for the partners , I know.
Hope this clarifies for you .