You cannot deduct losses in a traditional IRA on your federal tax return. The IRS classifies an IRA loss as a miscellaneous itemized deduction, and federal law has permanently eliminated that category of deduction for every tax year after 2017. If your account is worth less than what you contributed, the tax code offers no way to write off the difference. Older guidance suggesting you can still do it, usually by liquidating every IRA you own, is out of date.
Why the Deduction No Longer Exists
The Tax Cuts and Jobs Act of 2017 suspended all miscellaneous itemized deductions beginning in 2018. That suspension was originally set to expire after 2025. The One Big Beautiful Bill Act, signed in 2025, made it permanent. The current version of 26 U.S.C. § 67(h) allows no miscellaneous itemized deduction for any tax year beginning after December 31, 2017, with no sunset date.1Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
IRS Publication 529 states the practical result directly: a loss on your traditional IRA investment “is a miscellaneous itemized deduction and can no longer be deducted.”2Internal Revenue Service. Publication 529 – Miscellaneous Deductions The IRS has also confirmed that you should not report IRA gains or losses on your return while the account remains open.3Internal Revenue Service. Retirement Plans FAQs Regarding IRAs What the investments do inside the account is not a tax event. The tax picture only forms when money comes out.
This rule reaches Roth IRAs as well. Publication 529 groups both account types under the same prohibition.2Internal Revenue Service. Publication 529 – Miscellaneous Deductions Whichever type of IRA you hold, there is no federal deduction for investment losses inside it.
What Actually Helps When Your IRA Is Down
Since recognizing a loss inside an IRA produces no deduction, closing the account to “claim the loss” achieves nothing. Several other moves do help.
Rebalance inside the account. You can sell losing investments within your IRA and buy different holdings without triggering any tax. Transactions inside an IRA are not taxable events, so repositioning the portfolio costs nothing on your return.
Consider a Roth conversion at low values. A downturn lets you convert traditional IRA money to a Roth while the balance is smaller, so the income tax you owe on the conversion is smaller too. After that, growth inside the Roth is tax-free and qualified withdrawals are never taxed. Watch the aggregation and pro-rata rules if you hold more than one traditional-type IRA: the IRS treats every traditional, SEP, and SIMPLE IRA you own as one account for tax purposes, so any conversion pulls a proportional share of pre-tax and after-tax money from the combined pool. Roth IRAs are not included in that aggregation.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs
Harvest losses in taxable accounts instead. If you own similar investments in a regular brokerage account, selling them at a loss produces a deductible capital loss. You can offset capital gains dollar for dollar and deduct up to $3,000 of net capital losses against ordinary income each year, carrying any excess forward. Tax-loss harvesting only works in taxable accounts. It cannot be done inside an IRA.
Why Your IRA Basis Still Matters
The loss deduction is gone, but tracking your basis is still important, because basis controls how much of a distribution is taxable. Basis is the non-deductible contributions you made with after-tax dollars. When you withdraw from a traditional IRA that holds both pre-tax and after-tax money, only the pre-tax portion and earnings are taxable. Your basis comes back tax-free.
If you made non-deductible contributions and never tracked them, the IRS treats the entire distribution as taxable, and you end up paying tax twice on the same money. You track basis on IRS Form 8606, filed with your return in any year you make a non-deductible contribution or take a distribution from a traditional IRA that contains basis.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs The form carries your cumulative basis forward by summing all non-deductible contributions and subtracting the non-taxable portion of any prior distributions. If you never filed the form but did make non-deductible contributions, you can file it retroactively to establish your basis.
What Happens If You Close the IRA Anyway
Liquidating a traditional IRA before age 59½ generally triggers a 10 percent additional tax on the taxable portion of the distribution. The taxable portion is everything except your basis. If your account has dropped to $32,000 and your basis is $40,000, the entire $32,000 is a return of basis and no penalty applies. If your basis is only $10,000, then $22,000 is taxable and the 10 percent penalty falls on that $22,000.
The custodian will report the withdrawal on Form 1099-R, showing the gross amount and the taxable amount.5Internal Revenue Service. About Form 1099-R You still file Form 8606 with your return to calculate the non-taxable portion from your basis, even though no deduction is available for any loss.4Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs In almost every case, the better decision is to stay invested, adjust your allocation if the mix no longer fits, and let the account keep compounding tax-deferred.