How to Deduct IRA Losses?

In limited and unusual circumstances, losses from an IRA can be treated as a deductible loss.
1. You must withdraw the entire balance from all your IRAs of the same type;
2. And the total distribution is less than after tax basis.

How to decide the after tax basis of your IRA?

(1) Traditional IRAThere is only one way to get basis in your traditional IRA account: making nondeductible contributions to your traditional IRA account in prior years. If you have never made nondeductible contributions to your traditional IRA account, you don't have "basis" in the IRA. If you don't have basis in the IRA, you'll never have a deductible loss. A loss in value of your IRA is in no way deductible.

(2) Roth IRAIt is much easier to claim a loss on a Roth IRA because, by definition, contributions or conversions, or both, to a Roth IRA are considered nondeductible contributions. Thus, all of those contributions would add to the basis of the Roth IRA.


How to claim your loss?

Any allowable loss from either a traditional or a Roth IRA is only deductible as a miscellaneous itemized deduction (not as a capital loss) and subject to the 2% of adjusted gross income (AGI) rule.

So, be aware of the following two points.
1. The deduction is available only if you itemize. If you do not itemize your deduction, then the loss would actually be meaningless from an overall tax saving standpoint.
2. Miscellaneous deductions aren't allowed for purposes of the alternative minimum tax (AMT). That means you could lose the benefit of the deduction (or some of the benefit) because of the AMT rules. This type of AMT situation doesn't give rise to an AMT credit you can recover in future years, so any part of the deduction that gets swallowed up in the AMT is lost forever.

The last thing to mention here is that you have to act soon enough to liquidate the account by December 31 if you want to claim a deduction this year.