If your IRA loses value, you generally cannot deduct that investment loss on your U.S. federal income tax return while the account remains open. The IRS says not to include gains or losses from an open IRA on your return. A traditional IRA’s tax basis and the tax treatment of a later withdrawal are separate issues from the account’s market decline.
What to do when your IRA loses value
- Check whether the account is still open. The IRS rule for an open IRA is that you do not take its investment gains or losses into account on your federal return. A lower balance, or selling an investment within the IRA, does not by itself create a deductible loss. See the IRS IRA FAQs.
- Identify the IRA type. Traditional and Roth IRAs have different distribution rules, but an investment decline inside either type does not give you a current deduction while the IRA is open.
- If it is a traditional IRA, check your basis records. Look for records of nondeductible contributions, after-tax rollover amounts, and previously filed Forms 8606. The market decline itself does not create basis.
- If you take a distribution, calculate its taxable and nontaxable portions under the distribution rules. Do not report the account’s decline as a capital loss instead.
How traditional IRA basis affects a later withdrawal
Basis is generally the unrecovered amount of nondeductible contributions and certain after-tax amounts, not the difference between what you invested and what the account is now worth. The IRS explains that nondeductible contributions can give a traditional IRA a cost basis in Publication 590-A.
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If you have basis, a later traditional IRA distribution may include both taxable money and a tax-free return of basis. Form 8606 is used to determine the nontaxable share when applicable. If you have no basis—for example, your contributions were deductible—traditional IRA distributions are generally fully taxable. Review the current-year Instructions for Form 8606 and Publication 590-B for the rules that apply to your filing year.
Keep records of nondeductible contributions and filed Forms 8606 so you can substantiate basis when you later take money out. An account’s loss in value does not erase the need to track basis, nor does it create a separate deduction for the decline.
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Roth IRA losses and withdrawals
A Roth IRA investment decline also does not produce a current deduction while the account is open. If you later withdraw money, apply the Roth IRA distribution rules; do not claim the decline itself as an investment loss on your federal return.
Worthless investments: IRA versus taxable account
Publication 550 describes a separate rule for securities that become completely worthless in a taxable account: they may be treated as sold in the year they become worthless. That rule does not convert a worthless investment held inside an open IRA into a current IRA loss deduction. First establish which account owned the security; the IRS’s open-IRA guidance governs the IRA case, while Publication 550 addresses taxable-account investment treatment.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Quick guide to common situations
| Situation | General federal tax treatment | What to do |
|---|---|---|
| Investment value falls while the IRA remains open | No current deduction for the IRA investment loss. | Do not report the decline as an IRA loss. |
| Traditional IRA has nondeductible contributions | Basis may make part of a later distribution nontaxable; basis is not the market loss. | Reconcile contribution records and Forms 8606. |
| Traditional IRA has no basis | Distributions are generally fully taxable. | Report distributions under the applicable instructions. |
| Roth IRA investment declines | No current deduction while the account is open. | Use Roth distribution rules for later withdrawals. |
| Security becomes worthless in a taxable account | Publication 550’s separate worthless-security treatment may apply, depending on the facts. | Establish the ownership, year of worthlessness, and transaction facts before reporting. |
| Security becomes worthless inside an open IRA | It remains an investment loss inside the open IRA for purposes of the open-account rule. | Do not claim a current IRA loss deduction solely because it became worthless. |
When you need more specific tax guidance
The general open-account rule does not resolve every filing question involving a closed IRA, unusual or self-directed assets, inherited IRAs, or a missed basis filing. For those situations—or a large distribution—consult the current applicable-year form instructions and a tax professional who can review your account history. Tax forms and annual reporting requirements can change; the IRS forms and instructions index provides current materials. This article addresses U.S. federal income tax; state treatment may differ.
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