What Is K-1 Box 19 Code A? Basis, Taxable Gains, and Hot Assets

Box 19 Code A on a K-1 (Form 1065) is the total cash and fair market value of marketable securities the partnership distributed to you during the tax year. The number itself is not automatically taxable. Whether you owe anything depends on your adjusted basis in the partnership interest: if the distribution is less than or equal to your basis, it’s a tax-free return of capital; if it exceeds your basis, the excess is a taxable capital gain.

What the Code A Number Actually Represents

The IRS defines Code A as “cash and marketable securities other than for services.”¹ Marketable securities are treated as money for distribution purposes and are valued at fair market value on the date of distribution.² When the partnership distributes marketable securities, it should attach a statement showing both the fair market value and its adjusted basis in those securities.

One boundary matters up front. A decrease in your share of partnership liabilities is legally treated as a cash distribution, but the partnership reports that under Code D, not Code A.¹ Both figures reduce your basis and both can trigger gain, so a partner who reads only Code A is looking at half the picture.

When the Distribution Is Tax-Free

If the Code A amount is less than or equal to your adjusted basis immediately before the distribution, the entire amount is a tax-free return of capital.² Your basis simply drops by the amount you received.³

Basis is a running balance. It starts with what you contributed and adjusts every year: your share of partnership income and any additional contributions increase it, and an increase in your share of partnership liabilities also raises it.⁴⁵ Distributions, losses, and nondeductible expenses reduce it.

A quick example. Say you start the year with a $50,000 basis. The partnership allocates $10,000 of income to you, raising your basis to $60,000. It then distributes $30,000 in cash, reported as Code A. Because $30,000 is less than $60,000, you owe nothing. Your basis after the distribution is $30,000.

When the Distribution Triggers a Taxable Gain

Gain kicks in only when cash plus marketable securities distributed exceed your adjusted basis immediately before the distribution. The portion up to your basis is still a tax-free return of capital; only the excess is taxed. The gain is treated as if you sold your partnership interest for that excess amount.²

Change the earlier example: same $60,000 basis, but a $75,000 distribution. The first $60,000 brings your basis to zero tax-free. The remaining $15,000 is recognized capital gain, generally treated as gain from the sale or exchange of the partnership interest.⁶

How that gain is rated depends on how long you’ve held the partnership interest. If you’ve held it more than a year, the gain is long-term and taxed at preferential rates.⁷ For 2026, long-term rates are 0%, 15%, or 20% depending on taxable income; a single filer pays 0% up to $49,450 of taxable income, 15% up to $545,500, and 20% above that.⁸ A holding period of a year or less makes the gain short-term, taxed at ordinary income rates.

The Hot Assets Exception

Capital gain treatment has a significant exception. If the partnership holds “hot assets,” meaning unrealized receivables or certain inventory items, the portion of the gain attributable to your share of those assets is taxed as ordinary income rather than capital gain.⁶ The K-1 instructions for Code A say the same: “the amount of the distribution attributable to your share of the partnership’s unrealized receivables or inventory items results in ordinary income.”¹

Unrealized receivables cover more than unpaid invoices. The category also picks up various depreciation recapture items, meaning the gain the partnership would recognize on equipment, buildings, and other assets if it sold them.⁹ If the partnership owns depreciated equipment or real property, recapture sitting inside those assets can convert what looks like capital gain into ordinary income. The rate difference is often substantial, so if the partnership carries significant depreciable property or receivables, this is worth a professional review.

Don’t Overlook Code D

Because a drop in your share of partnership debt is a deemed cash distribution, it eats into the same basis your Code A distribution does.¹⁰ It appears on Box 19 as Code D, and you didn’t receive any actual cash for it, but it can combine with your Code A amount to push you over your basis and into taxable gain.

A partner who focuses only on the Code A figure and skips Code D can badly underestimate how much basis has been consumed by year-end. Any time your K-1 shows both codes, treat them as one combined distribution for purposes of running the basis math.

How to Report an Excess Distribution

When the Code A distribution (plus any Code D deemed distribution) exceeds your basis, you report the excess as gain from the sale or exchange of your partnership interest.

Form 8949 reports the transaction as a disposition of a capital asset. The “sales price” is the excess distribution amount. Because the distribution has already reduced your basis to zero, the cost basis reported is zero.¹¹
Schedule D (Form 1040) picks up the subtotals from Form 8949 and consolidates your capital gains and losses.¹²

If any portion of the gain is attributable to hot assets, that ordinary income piece is reported separately from the capital gain portion. The partnership should give you the split, though in practice you may have to ask.

The 3.8% Net Investment Income Tax

Excess-distribution gain doesn’t just face the capital gains rate. If your modified adjusted gross income exceeds a statutory threshold, you may also owe the 3.8% Net Investment Income Tax. The thresholds are fixed by statute and are not indexed for inflation:¹³

$250,000 for married filing jointly or a qualifying surviving spouse
$200,000 for single or head of household
$125,000 for married filing separately

The surtax applies to the lesser of your net investment income or the amount by which modified AGI exceeds the threshold. Capital gains from partnership distributions generally count as net investment income. If you materially participate in the partnership’s trade or business, the analysis is more nuanced and part or all of the gain may be excluded, depending on the partnership’s assets.¹³ For a passive investor in a limited partnership, the gain is almost certainly subject to the surtax.

Tracking Your Basis Is on You

The IRS puts the tracking obligation on the partner, not the partnership. The K-1 instructions state that “it’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership.”¹ The partnership provides the pieces: income allocations, distribution amounts, liability shares. Assembling those into a running basis is your job.

Most Code A problems start here. A partner who hasn’t tracked basis in years gets a distribution, can’t tell whether it exceeds basis, and either ignores the question or guesses. The IRS can request documentation to support your basis calculation. Underreporting gain triggers accuracy-related penalties; overreporting means paying tax you didn’t owe.

If you’ve fallen behind, reconstruction is almost always possible from prior K-1s, contribution and distribution records, and your liability shares for each year. A tax professional who works with partnership returns can rebuild the calculation, though the cost scales with the number of years and the complexity of the partnership.

1
Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
2
Office of the Law Revision Counsel. 26 U.S. Code 731 – Extent of Recognition of Gain or Loss on Distribution
3
Office of the Law Revision Counsel. 26 USC 733 – Basis of Distributee Partner’s Interest
4
Office of the Law Revision Counsel. 26 U.S. Code 705 – Determination of Basis of Partner’s Interest
5
Office of the Law Revision Counsel. 26 USC 752 – Treatment of Certain Liabilities
6
Office of the Law Revision Counsel. 26 USC 741 – Recognition and Character of Gain or Loss on Sale or Exchange
7
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
8
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
9
eCFR. 26 CFR 1.751-1 – Unrealized Receivables and Inventory Items
10
Internal Revenue Service. Recourse vs. Nonrecourse Liabilities
11
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
12
Internal Revenue Service. Instructions for Form 8949 Sales and Other Dispositions of Capital Assets
13
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax