I opened a crypto regular IRA in tax year 2021 and funded it with untaxed funds from my job's 401k. Since then, the value of the crypto assets in the IRA have declined but I believe this is a cyclical downturn so I'm holding on. At age 61, if I take a distribution in tax year 2022 would I incur the tax liability in 2022 or when I ultimately sell the crypto assets for cash when I reach age 65?
Additionally, when I have to pay the taxes, would they be based on the higher value of the crypto assets when I funded the IRA in 2021, the lower current value at distribution in 2022, or the value in 2025 when I plan to sell the crypto assets?
@dubosea4 - simply, you pay ordianary taxes on whatever is distributed from the IRA- it's that simple.
within the IRA, if the value goes up or down, there are no tax consequences.
if you distribute the crypto from your IRA, you would pay ordinary tax on the value of the cyrpto at the time of the distribution. THAT also creates your cost basis for future sales.
If the value of the cryto declines from the time you bought it to the time you distributed it from your IRA, you get no benefit of capital loss.
At age 61, if I take a distribution in tax year 2022 would I incur the tax liability in 2022 or when I ultimately sell the crypto assets for cash when I reach age 65? you'd incur the tax liability when it was distributed and then a 2nd capital gains tax liaibility (assuuming it went up in value from the point of distribution) when you ultimately sold the position.
Additionally, when I have to pay the taxes, would they be based on the higher value of the crypto assets when I funded the IRA in 2021, the lower current value at distribution in 2022, or the value in 2025 when I plan to sell the crypto assets? the tax would be based on the value of the crypto at the time of distribution from the iRA (presumably the cost basis would be zero) and upon ultimate sale in 2025, the cost basis would be whatever the value was at the time of the original IRA distribution.
So you did a transfer or rollover from the 401K to the IRA? I assume it was to a Traditional IRA. When you take a distribution or withdrawal from a 401K or Traditional IRA it is taxed the year you take it as ordinary income at your tax rate.
You don't report it as a gain or loss. You don't have to worry about changes in value. The whole distribution is income. That's the benefit of IRAs, they grow tax deferred. But when you take it out it isn't taxed as capital gains just as regular income. If it goes down in value then you will be taking out less income to be taxed on.
You don't report any transactions, interest, dividends, gains or losses inside the IRA. Just distributions.
@dubosea4 - simply, you pay ordianary taxes on whatever is distributed from the IRA- it's that simple.
within the IRA, if the value goes up or down, there are no tax consequences.
if you distribute the crypto from your IRA, you would pay ordinary tax on the value of the cyrpto at the time of the distribution. THAT also creates your cost basis for future sales.
If the value of the cryto declines from the time you bought it to the time you distributed it from your IRA, you get no benefit of capital loss.
At age 61, if I take a distribution in tax year 2022 would I incur the tax liability in 2022 or when I ultimately sell the crypto assets for cash when I reach age 65? you'd incur the tax liability when it was distributed and then a 2nd capital gains tax liaibility (assuuming it went up in value from the point of distribution) when you ultimately sold the position.
Additionally, when I have to pay the taxes, would they be based on the higher value of the crypto assets when I funded the IRA in 2021, the lower current value at distribution in 2022, or the value in 2025 when I plan to sell the crypto assets? the tax would be based on the value of the crypto at the time of distribution from the iRA (presumably the cost basis would be zero) and upon ultimate sale in 2025, the cost basis would be whatever the value was at the time of the original IRA distribution.
generally you can take stock assets out "in-kind".
you may not be able to do that with crypto.
In any case you have to pay tax on the distribution actual value at the time.
Thank you for the very detailed response. In order to ensure I'm understanding this correctly, I'd like to use placeholder numbers to represent your guidance:
In 2021, at age 60, I transferred $10,000 in fiat from a 401k to a traditional crypto IRA that I used to fund 1,000 coins at a value of $10 each. Today, the value of each coin is $8. If I distribute the coins to my personal crypto wallet, I would incur a tax liability for tax year 2022 based on the current $8 value of each coin, even though I have not sold any of the coins for fiat/cash? Additionally, at this coin distribution, my cost basis for each coin would be established at $8 each?
Finally, assuming I sell the coins in 2025 at a value of $11 each my 2nd tax liability would be based on the $3 gain ($11 minus $8)? However, if I end up selling the coins in 2025 at a value of $7 each, my tax loss based on $1 ($8 minus $7) couldn't be used to offset unrelated capital gains?
This is what I expected except for the inability to offset any potential future losses to unrelated capital gains. Uncle Sam always has a zinger buried in the tax laws.
@dubosea4 - that is the correct way of thinking about it.
<<offset any potential future losses to unrelated capital gains>>
remember that the money that went into the IRA was pre-tax money, so the Government isn't going to let you take a tax loss (i.e. helping you offset your losses) on something you never paid tax on in the first place. THey already helped you out by not requiring you to pay tax prior to placing the money into the IRA; in that way, they share the loss by not requiring you to pay tax on the money in the first place.
make sense?