In sum, the sale of an MLP interest can result in an investor realizing a fair amount of ordinary income. It might also result in the taxpayer recognizing capital gain income, which is taxed at rates higher than the lowest capital gains rate. Tax planning, then, is important for any investor who wishes to minimize the effect of the ensuing taxes and maximize his real returns.

Tax Planning

With these tax consequences in mind, here are a few planning tips:

Be intentional about when you choose to sell your interest in the MLP. Under Section 706, the partnership's taxable year closes vis-a-vis the seller when he sells his interest. Notice that this affects the timing of when the seller will include gains, losses, deductions, and other items in his basis. Put simply, the sooner you sell, the sooner you need to include these items in your basis (because the partnership's taxable year 'ends' sooner). Depending on (1) your inherent gain/loss in the MLP, (2) the outlook for the partnership for the remainder of the taxable year, and (3) the presence of any potentially offsetting losses, you may want wait before selling your MLP interest.

Eoin Treacy's view Thank you for this enlightening note contributed in the spirit of Empowerment Through Knowledge. The tax implications of eventually selling instruments which make regular distributions and have high yields is a highly relevant consideration.

Pipeline MLPs have been among the greatest beneficiaries of the unconventional oil and gas boom in the USA not least because they thrive on increased volumes rather than the price of what they transport. The JP Morgan Alerian MLP ETF yields 4.46% and hit a peak below $50 last week. A process of mean reversion now appears to be underway.