I have investment losses in my traditional IRA. Can I take a deduction for the losses on the investments I’ve sold in the IRA?

I have investment losses in my traditional IRA. Can I take a deduction for the losses on the investments I’ve sold in the IRA?

Usually not. You can claim the loss only in the year in which all amounts in the account have been distributed to you and this amount is less than your basis. If you made only tax-deductible contributions to the IRA, you have no basis, so you can’t take the loss. If you made any nondeductible contributions, these count as your basis. Your basis is reduced by the portion of any distribution related to nondeductible contributions.

For example, say that a nondeductible IRA was funded with a $2,000 contribution (no deductible contributions were ever made to the account). The IRA earned $400 in income, and $600 was distributed from the account. The distribution, representing $500 of basis and $100 of income, brings the account down to $1,800; the unrecovered basis is $1,500 ($2,000 original contribution minus the $500 basis in the distribution). The following year, the account suffers investment losses of $500 and the remaining $1,300 is distributed. A loss of $200 can be claimed ($1,500 unrecovered basis minus $1,300 distribution.

Assuming you have basis, the loss is taken as a miscellaneous itemized deduction, which means that only total miscellaneous costs exceeding 2% of adjusted gross income can actually be deducted. And, for taxpayers subject to the alternative minimum tax, there is no benefit from claiming a miscellaneous itemized deduction because there is no such deduction from alternative minimum taxable income. Bottom line: IRA losses usually produce no tax write-offs.