Gains and losses on investments within an IRA normally have no tax impact. Only withdrawals from an IRA incur income tax. This includes withdrawal of accumulated gains, or what’s left of your original investment after a loss. These amounts are not calculated as capital gains. Instead, all distributions from an IRA are taxed as ordinary income, unless they are a return of previously non-deductible contributions. Losses within an IRA are not tax-deductible. However, you can put a loss on your tax return if you completely cash out all of your traditional IRA accounts and receive less than your investment basis.
Subtract your IRA contributions that were not deducted on your tax returns from the amount you received by cashing out all your IRAs. A negative number is your loss from receiving less than your basis. A positive number is a taxable distribution from cashing out your IRAs.
Report the amount of your loss (if any) from receiving less than your basis as a miscellaneous itemized deduction on Line 23 of Schedule A along with a description.
Place any taxable IRA distribution on Line 15B of your Form 1040 personal income tax return. This amount of distribution exceeding basis is taxable as ordinary income, not capital gain. (
- If you have received any distributions from your IRAs prior to cashing out, use IRS Form 8606 to determine your remaining IRA basis. This is the correct basis, rather than the sum of your non-deductible contributions.
- If you don’t have enough deductions to itemize, you receive no tax benefit from the loss on cashing out your IRAs.
- The loss on cashing out an IRA is added back to your taxable income to determine if you are subject to the alternative minimum tax.
- You must cash out all of your IRAs in order to deduct any loss. You’re not allowed to deduct a loss on only one account if you have other IRAs that aren’t cashed out.
- (See References 1, page 38)
Items you will need
- IRS Schedule A
- IRS Form 1040