Capital gains and losses inside an IRA have no immediate tax effect. The IRS ignores what happens inside the account, so selling a winner or a loser triggers nothing on your return that year. When money eventually leaves a Traditional IRA, it comes out as ordinary income regardless of whether the growth came from long-term gains, dividends, or interest. When money leaves a Roth IRA as a qualified distribution, it comes out tax-free. The cost of that shelter is that losses inside the account are not deductible, and gains that would have qualified for preferential capital gains rates in a taxable account lose that treatment on the way out of a Traditional IRA.
What Happens to Gains While the Money Stays Inside
Inside either a Traditional or Roth IRA, the character of an investment’s return does not matter for tax purposes. Short-term gains, long-term gains, dividends, and interest are all treated the same: nothing is owed until you take a distribution. The IRS treats the whole account as one tax-sheltered unit and does not track internal transactions.
In a Traditional IRA, this means tax-deferred compounding. Your entire balance keeps growing without the annual drag of taxes on realized gains or income. In a Roth IRA, the shelter goes further: because you contributed after-tax dollars, qualified withdrawals of the accumulated growth come out completely tax-free.
The practical benefit is freedom to trade. You can sell a stock at a profit and reinvest without a taxable event. Rebalancing, rotating sectors, or trimming winners generates no tax bill. In a taxable brokerage account, every profitable sale is a reporting obligation; inside an IRA, it is not. You do not file Form 8949 or Schedule D for trades that happen within the account.1Internal Revenue Service. Instructions for Form 8949 (2025) Your brokerage statement may show realized gains and losses, but those figures are informational only.
Why Losses Inside an IRA Are Not Deductible
If a stock drops 40% inside your IRA and you sell it, the loss reduces your account balance and nothing else. You cannot use it to offset gains in a taxable account, and you cannot deduct it on your return.
The reasoning is that the account already carries a tax benefit: a deduction on the way in for Traditional contributions, or tax-free growth for Roth contributions. Allowing a deductible loss on the securities inside would stack a second benefit on top of the first. So the IRS treats the account wrapper as the relevant unit, not the individual holdings.
This surprises investors used to tax-loss harvesting. In a taxable account, realized losses first offset realized gains, and any remaining net loss can reduce ordinary income by up to $3,000 per year, or $1,500 if married filing separately, with unused losses carrying forward indefinitely.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses None of that applies to transactions inside an IRA.
One takeaway shapes asset location. Highly volatile or speculative positions may be more tax-efficient in a taxable account, where losses at least generate deductions. Stable, income-producing assets can sit comfortably inside the IRA’s shelter.
The Wash Sale Trap Between a Taxable Account and an IRA
An IRA can do more than fail to help with a loss. It can destroy one you would have gotten in a taxable account. The wash sale rule disallows a capital loss if you buy a substantially identical security within 30 days before or after the sale.3Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities Normally the disallowed loss is added to the cost basis of the replacement shares, deferring the benefit rather than erasing it.
The IRS ruled that buying substantially identical stock in your Traditional or Roth IRA within 30 days of selling at a loss in a taxable account triggers the wash sale rule.4Internal Revenue Service. Revenue Ruling 2008-5 – Loss From Wash Sales of Stock or Securities Because the replacement shares sit inside a tax-advantaged account, the basis adjustment that would normally preserve the loss does not attach. The loss is gone for good.
The 30-day window runs in both directions, so buying the stock in your IRA shortly before selling it at a loss in the taxable account produces the same result. If you plan to harvest a loss in a taxable account, avoid buying the same or a substantially identical security in any IRA you own for at least 31 days on either side of the sale.
How the Tax Bill Actually Arrives
Tax on IRA gains is charged when money leaves the account. Your custodian reports every distribution on Form 1099-R, showing the gross amount in Box 1 and the taxable amount in Box 2a.5Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
Traditional IRA Withdrawals
For a Traditional IRA funded entirely with deductible contributions, the entire distribution is ordinary income. It does not matter whether the account grew through long-term gains, dividends, or interest: it all comes out at your marginal rate, which for 2026 can run as high as 37%.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 In a taxable account those same long-term gains would have been taxed at 0%, 15%, or 20%. That lost preferential treatment is the trade-off for years of tax-deferred compounding.
If you withdraw before age 59½, you generally owe an additional 10% early withdrawal tax on top of ordinary income tax. The IRS lists numerous exceptions, including disability, certain medical expenses, qualified first-time home purchases up to $10,000, and substantially equal periodic payments.7Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Once you reach age 73, required minimum distributions begin, and each RMD is taxed as ordinary income whether you need the money or not.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The IRS eventually collects tax on all of that deferred growth.
Roth IRA Withdrawals
Qualified Roth distributions are fully tax-free. To qualify, you must have held the Roth IRA for at least five tax years, and the distribution must occur after you reach age 59½, become disabled, or pass away with the distribution going to a beneficiary.9Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs Every dollar of accumulated gains comes out with no federal income tax.
If a distribution is not qualified, the earnings portion is taxable as ordinary income and may be subject to the 10% early withdrawal penalty. Contributions to a Roth, however, can always come out tax-free and penalty-free because tax was already paid on that money. Roth IRAs also have no lifetime RMDs for the original owner.
Nondeductible Contributions and the Pro-Rata Rule
If your Traditional IRA holds a mix of deductible and nondeductible contributions, you cannot withdraw the after-tax dollars first. Every distribution is treated as coming partly from pre-tax and partly from after-tax funds, in proportion to the mix across all of your Traditional, SEP, and SIMPLE IRAs combined.10Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
The calculation uses your December 31 balances. If nondeductible contributions represent 10% of your combined IRA balances, then 10% of any distribution that year is a tax-free return of basis and 90% is taxable as ordinary income. You cannot cherry-pick.
The rule matters most for backdoor Roth conversions. Large pre-tax IRA balances make converting a nondeductible contribution far more expensive than expected, because the pro-rata share of the conversion attributable to pre-tax money is taxable. Rolling pre-tax IRA balances into an employer 401(k) before converting, when the plan accepts incoming rollovers, sidesteps the issue.
To make any of this work, you need documentation. Form 8606 is your proof of after-tax basis, and you must file it for every year you make a nondeductible contribution and every year you take a distribution from an IRA that has basis.11Internal Revenue Service. About Form 8606, Nondeductible IRAs The direct penalty for skipping it is $50, but the real cost is worse: without a documented history of nondeductible contributions, the IRS treats your entire IRA balance as pre-tax and taxes money you already paid tax on.12Internal Revenue Service. 2025 Instructions for Form 8606 If you have missed filings in prior years, you can file late to establish basis.
Can You Ever Claim a Loss on the IRA Itself?
There was one narrow scenario where a loss connected to an IRA could produce a tax benefit. If you completely emptied all of your Traditional IRAs, or all of your Roth IRAs, and the total returned to you was less than your after-tax basis from years of Form 8606 filings, the shortfall was a loss on the IRA itself, not on any single security inside it. All similar IRAs had to be fully liquidated to qualify.
Even then, the deduction was modest. It was a miscellaneous itemized deduction subject to the 2% adjusted gross income floor, so only the portion above 2% of AGI counted, and only if you itemized.13Internal Revenue Service. Publication 529 (12/2020), Miscellaneous Deductions
The Tax Cuts and Jobs Act suspended that category of deductions for 2018 through 2025, and the One Big Beautiful Bill Act, signed August 5, 2025, made the elimination permanent.14Internal Revenue Service. One, Big, Beautiful Bill Provisions There is currently no mechanism for deducting a loss on a liquidated IRA. After-tax contributions that never come back to you are simply lost from a tax perspective, which is why tracking basis on Form 8606 and monitoring the investments inside the account are the only real protections you have.