Your brokerage shows one cost basis. The IRS expects another. For MLP investors, the difference can be thousands of dollars. Here's why, and how to find your real number.
By Lucas Andersen — Last updated March 6, 2026
If you own MLP units and plan to sell, your brokerage almost certainly reported the wrong cost basis to the IRS. Every year your MLP sends a Schedule K-1 that adjusts your cost basis — distributions reduce it, allocated income increases it, and liability changes shift it further. But your broker never sees the K-1. They only know what you originally paid.
The K-1 goes directly to you, not to your brokerage. Your broker tracks purchase price, units, and trade date — but not K-1 income allocations, distribution character, liability changes, suspended losses, or depreciation recapture. Every one of these items affects your cost basis every year, and every year the broker doesn’t adjust, the gap compounds.
200 units at $42 = $8,400 purchase price. After 5 years of distributions ($3.20/unit/year = $3,200 total), with net K-1 adjustments, IRS-adjusted basis drops to approximately $4,200. Broker still shows $8,400. If you sell at $50/unit ($10,000): broker reports $1,600 gain, IRS expects $5,800 gain — and part is §751 ordinary income at up to 37%.
Scenario A: Report broker’s inflated basis → IRS cross-references K-1 data → CP2000 notice → back taxes + interest + possible penalties. Scenario B: Don’t add K-1 income increases to basis → over-report gain → pay tax twice on same income. Scenario C: Track basis correctly → report adjusted number on Form 8949 with Code B → pay the right amount.
On Form 8949: Column (e) = broker’s basis from 1099-B. Column (f) = adjustment Code B (basis reported but incorrect) or Code E. Column (g) = adjustment amount (typically negative, increasing gain). This is standard IRS procedure for MLP sales — it will not trigger additional scrutiny.
Option 1: Use a basis tracking tool that implements the IRS worksheet automatically. Option 2: Reconstruct manually from every K-1 since purchase. Option 3: Check the Sales Schedule in your final K-1 (year of sale only). The free K-1 Basis Tracker calculates your IRS-adjusted basis from your K-1 data for all major MLPs.
Years 1–3: gap is $500–$1,500. Years 4–7: $2,000–$5,000. Year 8+: can exceed 50% of original purchase price. When basis approaches zero, distributions become immediately taxable under §731. The reconstruction burden grows too — a gap in year 3 makes every subsequent year wrong. Start tracking now.