Untitled Document

June 2025

Considerations When a Hard to Value Asset is Distributed In-Kind

The IRS reporting of IRA transactions involving hard to value assets is certainly not boring. The email set forth below discusses the reporting applying to the distribution of a worthless hard to value IRA asset to an individual who is age 73 or older. The IRA trustee and the IRA grantor will have a number of considerations.

Situation/Question. Worthless Security Distribution
We have a client, over age 73, with a hard to value asset in his portfolio. The last valuation we had reported a valuation of $85,000 (which we were never confident was accurate) and we recently received a new valuation from the company that shows it is basically worthless. Can we just distribute this asset out to him with basically no tax consequence and no reporting? Or how do we proceed? Since it is now worthless we would like to get it out of the account and off our system.

CWF’s Response
Your IRA grantor is over age 73. Most likely he or she is receiving another distribution which must be reported on a Form 1099-R with a reason code 7. Under the IRS reporting rules all distributions from the same IRA with the same distribution code are aggregated on the same Form 1099-R. The IRA trustee must prepare a separate Form 1099-R if a different reason code applies.

The question is, must another Form 1099-R be prepared with a reason code K or is preparation of a separate Form 1099-R not required as the value is less than $10.00?
The IRS instructions mention that a Form 1099-R is not required to be prepared if the annual distribution amount is less than $10. The IRS encourages an IRA trustee/custodian to file a Form 1099-R even if not required.

The rule requiring preparation of the Form 1099-R is a per person per plan agreement rule and is not a per reason code rule. This means, if he takes a reason code 7 distribution from his IRA plan agreement and it exceeds $10 and he is also distributed the hard to value asset from this same IRA plan agreement, then the IRA trustee must prepare two separate Form 1099-R’s. This is so even though the value of the distribution of the hard to value asset is $0.00.

If the hard to value asset being distributed was held under one plan agreement and the other hard to value assets under a different plan agreement, the approach of not preparing a Form 1099-R for a distribution of a worthless asset would be possible.

Is the issuer still in business? Any bankruptcy action? What chance for recovery?
This situation does present some good tax planning opportunities for the individual. He or she should want to take a distribution when the value has decreased greatly. But there is also a great opportunity for aggressive tax results when a hard to value asset is distributed from an IRA with no value or with minimal value. For example, the stock or debt instrument is distributed with a near $0.00 value but there is some possibility the asset value might rebound. The individual wants the rebound to occur after the asset has been distributed from the IRA. The individual will be able to pay capital gain tax on the increase in value assuming the time requirements are met, but the taxpayer is not required to pay ordinary income tax as is the rule for IRA distributions.

We suggest receiving a written instruction from the IRA accountholder that he or she requests the in-kind distribution and that he or she agrees with the indicated distribution value.
From the IRS viewpoint, we can see the IRS arguing (and maybe bank regulators) why not continue to maintain the asset in the IRA as the value can only go up. One can argue that the distribution of this asset will make the administration of the IRA less complicated and less expensive. The individual can argue, it is in my best interest from a tax planning standpoint to withdraw it from the IRA when the value has decreased and to save on administrative expenses.