Can You Deduct IRA Losses?

You just got a statement from your IRA custodian and your account is hemorrhaging red ink. Can you deduct those losses? For traditional IRAs, the simple answer is No. But nothing is simple when you are dealing with the tax code. If you cash in all your IRAs, which you must do before you can claim a loss, and the total amount you receive is less than your basis in the IRA, the loss may be deductible. The kicker is that to have a basis in a traditional IRA, you need to have made some non-deductible contributions to it somewhere along the line. If you never did, you have no basis and therefore no deductible loss.

You just got a statement from your IRA custodian and your account is hemorrhaging red ink. Can you deduct those losses? For traditional IRAs, the simple answer is “No.” But nothing is simple when you’re dealing with the tax code.

If you cash in all your IRAs, which you must do before you can claim a loss, and the total amount you receive is less than your basis in the IRA, the loss may be deductible. The kicker is that to have a basis in a traditional IRA, you need to have made some non-deductible contributions to it somewhere along the line. If you never did, you have no basis and therefore no deductible loss.

What about a Roth IRA? The odds of having a deductible loss in a Roth are somewhat better, since any amount you contributed to it is considered your basis. Other than that, the same rules apply—you must liquidate all your Roth IRAs and the net distribution must be less than your basis. If, for example, you put $10,000 into a Roth that’s now worth $5,000, you would have a deductible loss of $5,000.

But even if you pass those tests, there’s more bad news. When you file your return, your IRA loss won’t show up as a capital loss on Schedule D; instead it becomes a miscellaneous itemized deduction, which you can write off only when the total of all those deductions exceeds 2% of your adjusted gross income. And if you take the standard deduction instead of itemizing, your IRA losses are worthless from a tax standpoint. For more on IRA loss deductions, take a look at IRS Publication 590 at www.irs.gov.