If my IRA custodian paid 990-T taxes on $25,000 of income in my IRA now, and I then receive a $40,000 IRS distribution in 2019, I should pay income tax (on my 1040) on $15,000, not $40,000. Otherwise I'm paying tax on the same $25,000 twice.
No, your IRA, not you, is paying UBIT on the UBTI. Yes, when the funds in your IRA are distributed to you, they will be taxable income to you, a separate taxable transaction. There is nothing you can do to offset the UBIT paid, it's the cost of having your IRA invested in investments that are subject to UBIT. The UBIT paid simply represents the equivalent of an investment loss that reduces the gain in your IRA value that resulted from the UBTI.
You should be paying the taxes on the 990-T from the IRA funds and not from outside IRA sources. Doing it that way reduces the income in the IRA so you naturally don't pay taxes a second time.
Paying the UBIT with funds outside the IRA would likely constitute a prohibited transaction that disqualifies the IRA.
My question should read "won't I pay tax a second time on the same money when I pay taxes later on my IRA distributions? The same money as listed on the 990-T will be paid out to me at some point as a distribution, at which time I'll pay income tax on it. That would make the second time that I had paid taxes (once by the custodian on the 990-T now, and a second time later by me when I take the distribution, on my 1040.) Therefore, I should be able to list the taxes paid on my 1040 now since I am paying them now (by the custodian on the 990-T). Or, if not that, then I should be able to subtract the UBIT dollar amount upon which the 990-T tax was paid from the distributions when I receive them. If tax on $25,000 is paid now by the IRA custodian, then if I receive a $40,000 IRA distribution next year, I should only have to pay tax on $15,000. Otherwise I'm paying twice on the same $25,000 income."
That is an excellent example if why owning such an investment within an IRA is not recommended.
You want to avoid UBTI, because the IRA owner essentially is taxed twice on it. The IRA will be taxed on the income. Subsequently, the owner or beneficiary will be taxed on distributions of that income. No deduction or credit is available to the owner for UBTI paid by the IRA and the tax is not added to the tax basis of the IRA.
What if a merger occurred of stock held in an IRA which results in a loss from stock purchased prior to merger? Example; stock A was purchased at $40 in IRA. Stock A dropped to $10 per share. Stock A was merged with Stock B at a .33 rate of shares (100 shares gets 33 shares of new stock). Then the custodian files a 990T which shows UBIT on the merger plus a schedule D showing capital gains. How is the $30 per share loss on Stock A accounted for? There was no capital gain. However, there was a loss on capital gain.