Tax Deduction on Realized IRA Losses

by David Carnes

An individual retirement account (IRA), is an investment vehicle that allows you to save for retirement. Many IRS funds make investments, and these investments sometimes result in losses. You realize a capital loss when you sell an investment for less than its basis -- normally, the original purchase price. Subject to restrictions, the IRS allows you to deduct IRA losses from your taxable income.

Restrictions

You may only deduct your losses if the amount you lost was contributed to a nondeductible IRA or a Roth IRA. If your capital gains during the tax year equal or exceed your capital losses, you may deduct your capital losses only against your capital gains. If your capital losses exceed your capital gains, you may deduct the excess portion against your ordinary income, up to a limit of $3,000 ($1,500 for married taxpayers filing separately).

Short-Term and Long-Term Losses

The IRS divides capital gains and losses into two categories--short-term and long-term. A short-term gain or loss occurs when you sell a capital asset, such as corporate shares, one year or less after you bought it. You incur a long-term capital gain or loss if you sell the asset more than one year after you bought it. You cannot deduct your short-term capital losses from your long-term capital gains, and you cannot deduct your long-term capital losses from your short-term capital gains -- you must keep these categories separate. This is significant because the IRS taxes short-term capital gains at ordinary income tax rates, while it taxes long-term capital gains at special (and usually lower) capital gains tax rates.

Carryovers

If your capital losses exceed your capital gains by more than $3,000, you may carry over the excess losses to the following tax year. The following year you may add the carryover amount to any capital losses you incur that year, and deduct it from your taxable income starting with any capital gains you incur that year. There is no limit on how much you may carry over.

Filing Requirements

You must report capital gains and losses on the version of Schedule D that is designed to be used with Form 1040, and on Line 13 of Form 1040. Although you don't have to submit supporting documentation with your tax return, the IRS might request it if they decide to audit you.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.