If 2018 RMD, broker distributed as shares, what is taxable amount and what is cost basis and date for shares transferred from IRA to taxable account when sold?

[Toanoman]

For 2018 RMD,  If $30,000 shares purchased in 2012 and transferred from IRA to taxable account in 2018 as RMD with value on transfer date of $100,000  - What is tax impact of the RMD to 2018 income and what is the tax treatment on sale of shares in 2019?.  If there is double taxation, is it better to sell shares in IRA prior to RMD distribution and take hit to income in 2018?

[Opus 17]

@dmertz

[Hal_Al]

You may have heard of a special tax treatment for the distribution of company shares from a 401k (or similar) plan.  But that  treatment is not available for distribution from an IRA, even if previous rolled over from a 401k.

Tax wise, it makes not difference whether you sell the shares before or after distribution. The tax hit comes in 2018, either way.

[Opus 17 · Accepted solution]

As best I can tell, you pay income tax now based on the market value on the date of transfer to a non-IRA account.  That becomes your cost basis, so when you sell in the future, you will figure any additional capital gain or loss from that basis.  It's not going to be taxed twice.

[dmertz]

Correct.  If shares are distributed in-kind from an IRA, the cost basis is the Fair Market Value of the shares on the date of the distribution, the same as the gross distribution amount included in box 1 of the Form 1099-R reporting the distribution.  The taxable amount of the distribution is calculated on the box 1 amount the same as any distribution from the IRA.

The taxable amount of any subsequent sale of the shares would be the gain minus this cost basis.  The holding period for the shares begins on the date of distribution.  If the shares are sold within one year of them being distributed from the IRA, the gain will be a short-term capital gain.  Held longer than that before selling and the gain will be taxable as a long-term capital gain.

Overall, the result of an in-kind distribution is equivalent to selling the shares inside the IRA, distributing cash from the IRA, then repurchasing the shares outside the IRA at the same price.  The benefit of distributing the shares in-kind is that there is no overhead such as transactions fees that might be incurred if you sold and then repurchased shares.  Of course if your intent is to sell the shares immediately upon distribution from the IRA, there is generally no benefit to doing the distribution in-kind.

[Toanoman]

Thanks, this makes sense and answers my question.