An IRA may be a source for a tax deduction if you lose money on the investments purchased with the account. The deductibility of any loss depends on its tax basis and if you itemize your deductions. The loss is deducted against your income and is not subject to the capital loss deduction limitation of $3,000 per year.
The tax basis in any IRA account is the amount of money that the account holds after taxes. If you have taken a deduction for IRA contributions, the money is before-tax money, meaning that it has no tax basis. The tax basis is used for calculating the total deductible loss on the account.
Most contributions to a traditional IRA are deducted from your income, making these before-tax contributions. Some taxpayers are not eligible to deduct their IRA contributions, but still make a non-deductible traditional IRA contribution. These non-deductible contributions are after-tax money, and are part of the tax basis of the IRA. Taxpayers making non-deductible contributions must file Form 8606 to track the total non-deductible contributions and tax basis of the account.
All of your Roth IRA contributions are after taxes, as you take no deduction when you make the contributions, so the value of all of your Roth IRA contributions is the tax basis of the account, less any withdrawals. If you contributed $30,000 to a Roth, and withdrew $5,000, the tax basis of the account is $25,000.
To deduct the losses from your IRA account, you must completely liquidate all of your traditional IRAs if you are claiming a loss on your traditional IRA money, or all of your Roth IRAs that you own if your loss comes from your Roth investments. You cannot keep any accounts open and still claim a deduction for a loss on your IRA.
You claim IRA losses on your Schedule A when you itemize deductions as a miscellaneous deduction. Miscellaneous deductions are subject to a 2 percent minimum of your adjusted gross income. If you have $100,000 in adjusted gross income, you would need a minimum of $2,000 in miscellaneous deductions to claim an IRA loss. If you have $3,000 in IRA losses with no other miscellaneous deductions, you can deduct $1,000 in these losses or the amount that exceeds the 2 percent minimum.
Alternative Minimum Tax
The alternative minimum tax is a secondary tax system set up to make certain that taxpayers pay a certain amount in taxes regardless of their deductions. If you are subject to the alternative minimum tax, you lose many of your usual itemized deductions, including the miscellaneous deduction where you claim IRA losses. Try to plan claiming your IRA losses for a year when you are not subject to the alternative minimum tax if possible.