If you sold stocks in your individual retirement account at a loss, the Internal Revenue Service won't show you much mercy. The tax code treats investment losses within an IRA far less generously than those outside an IRA. Most people who lose money on stocks in an IRA won't be able to deduct their stock loss. Those who may have a deductible loss must give up tax advantages on their retirement savings to claim the loss.
You must itemize deductions on Schedule A to claim an IRA stock loss. But you can't do so while any money remains in your account. You must close out your IRA and take all of the money as a cash distribution. If you have multiple IRAs, you must close out all of them, not just the one that suffered the loss. By closing your accounts, you will no longer enjoy the IRAs' tax advantages.
It's difficult to claim a stock loss deduction from a traditional, tax-deferred IRA. To do so, you must have a "basis" in your IRA. This consists of nondeductible, after-tax money you contributed to the account. You have a deductible loss only if the total distribution from all your tax-deferred IRAs is less than your total basis in these accounts. If you deducted all of your contributions to your traditional IRA, you have no basis in the account, so none of your stock losses are deductible.
If you had $10,000 in a tax-deferred IRA, of which $3,000 was from nondeductible contributions, you would have a basis of $3,000 in the account. If you invested the $10,000 in stocks but saw them plummet to $2,000, your account would be worth less than your $3,000 basis and you would have a $1,000 deductible stock loss if you closed the account. Before you act, you should figure in the income tax and any tax penalties that would offset your $1,000 stock loss if you close the IRA. If you are in the 25 percent tax bracket, you would owe $500 in income tax on the $2,000 distribution. If under age 59 1/2, you would also owe a $200 early withdrawal penalty, leaving you with a net stock loss deduction of just $300.
It's a little easier to claim stock sale losses in a Roth IRA because all of your contributions are after-tax money that counts toward your basis. You still must close out all of your Roth accounts to claim the loss. You get a stock loss deduction only if the sum of the distributions from all of your Roth accounts is less than the total amount you contributed to those accounts. For example, if you had two Roth accounts, closed them both for total proceeds of $10,000 but had contributed $13,000 to them, you could claim a $3,000 loss. But if you had a $3,000 loss on one Roth and a $3,500 gain on the other, you would receive $13,500 when closing them both. You would have no deductible loss.
If you do have a deductible IRA stock loss, there's another consideration in deciding whether to claim the loss. You can't take IRA investment losses as a capital loss. Instead, you claim IRA investment losses as a miscellaneous deduction, subject to the 2 percent income exclusion. You must add your IRA loss to all of your other miscellaneous deductions. You get to deduct only the portion of the total that exceeds 2 percent of your adjusted gross income.
- Jupiterimages/Comstock/Getty Images