Roth IRA distribution - digital asset cost basis

[Questionasker]

If a distribution is taken from a self directed Roth IRA of a pre-launch digital asset (that is, a pre-ICO rights certificate, for a cryptocurrency token which is not yet publicly traded), what determines the cost basis for that asset, for future purposes?

Scenario 1:

If the asset has not yet launched and not yet publicly tradable at the time of the distribution? (At which time the custodian signs off that they no longer hold it.)

Would the future cost basis be the cost at which it was purchased (that is, for rights agreements that were purchased), or granted (that is, for rights agreements that were granted free, that is, $0)?

Scenario 2:

If the asset has launched and starts to trade but the distribution from the Roth IRA of the rights certificate is taken after the asset has launched and is trading.

Would the future cost basis be the cost of purchase, or $0 if received free, or, some other method that determines a market value of the token being traded if the rights certificate were redeemed for the tradable token?

[DianeW777]

The simple answer is your cost basis will always be what you paid into the plan with after-tax dollars or if you paid zero that is your cost. 

Information about a self-directed Roth IRA (SDRIRA) is a retirement account that allows investors to hold a broader range of assets beyond traditional stocks and bonds, including real estate, private placements, and cryptocurrency.

1. The purchase price will always be your cost basis. If that cost is zero then all distributions in that account will remain tax free at distribution. It's important to know your cost in the plan every step of the way so that you always know what you actually put in the SDRIRA until fully distributed.
2. Same cost basis as number 1. above.
   1. Cost is any after-tax dollars you contribute to the SDRIRA.

As long as you meet the qualifications none of the money removed from your Roth IRA will be taxable.

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

• It is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.
• The payment or distribution is:
  • Made on or after the date you reach age 59½,
  • Made because you are disabled (defined earlier),
  • Made to a beneficiary or to your estate after your death, OR 
  • One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
• IRS Publication 590b

[Questionasker]

To clarify, regarding the cost basis going forward for the now taxable asset after it was distributed from the Roth account:

As stated in answer, when the asset in the Roth account is distributed, the cost basis is what was paid, and no tax is incurred at time of distribution.

However, going forward, once the asset has been distributed from the Roth and is now a taxable asset, if sold in future at a gain what will the cost basis be? Will the cost basis be the value when the distribution was taken, or the original cost basis when first purchased in the Roth?

Example: Purchased with Roth money (after tax dollars) for $1, then a year later distribution is taken while market value is $2. No tax incurred. Then a year later the asset is sold for $3. Is there a $1 capital gain? Or $2 capital gain?

[dmertz]

The cost basis and holding period of an asset distributed in-kind from an IRA is the same as if you sold the asset inside the IRA, distributed the cash, then repurchased the asset at the same price outside the IRA.  That's the same amount that the IRA custodian should have included in box 1 of the Form 1099-R that reports the in-kind distribution.