You do not pay capital gains tax on a traditional IRA. Every dollar you withdraw from a traditional IRA funded with deductible contributions is taxed as ordinary income at your regular federal tax rate, which runs from 10% to 37% in 2026.1Internal Revenue Service. Federal Income Tax Rates and Brackets The favorable long-term capital gains rates that apply in a regular brokerage account never apply to IRA withdrawals, no matter how long you held the investments inside.
Why Trades Inside the Account Are Invisible to the IRS
Federal law treats a traditional IRA as a tax-exempt entity while your money stays in the account. Under 26 U.S.C. ยง408(e), the account itself is exempt from income tax, so every transaction that happens inside it is invisible to the IRS for the current year.2Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts You can sell a stock at a large profit, rotate into bonds, or liquidate a mutual fund position without creating a taxable event. The gains stay in the account and keep compounding.
That means the concept of a capital gain, short-term or long-term, does not exist inside the IRA wrapper. There is no gain to report, no loss to harvest, no holding-period clock to watch. Dividends and interest paid into the account are also untouched by tax while they remain there.
How Withdrawals Are Actually Taxed
Once money leaves the account, the character of the underlying investment is irrelevant. A dollar of growth that came from a stock held twenty years and a dollar of growth that came from a bond held two months are taxed identically: as ordinary income on your return.3Internal Revenue Service. Traditional IRAs
The practical impact is easy to see. If you withdraw $30,000 in a year when your marginal federal rate is 22%, you owe $6,600 on that distribution. You will not qualify for the 0% or 15% long-term capital gains brackets that might apply to the same gain in a taxable account.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses Large withdrawals can also push you into a higher bracket, so spreading distributions across multiple years is one of the more effective planning moves available.
Your IRA custodian reports each distribution to the IRS on Form 1099-R, which shows the gross amount, the taxable portion, and a distribution code indicating the reason for the withdrawal.5Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 You report that income on your tax return the same way you would wages or self-employment income.
How This Compares to a Taxable Brokerage Account
In a regular brokerage account, selling an investment at a profit triggers a capital gains tax bill that year. Long-term gains are taxed at 0%, 15%, or 20% depending on your income, and short-term gains are taxed at your ordinary rate.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses Inside a traditional IRA none of that applies. You can rebalance aggressively, chase higher-yielding funds, or sell after one day without any tax drag along the way.
The tradeoff comes at the end. In exchange for years or decades of tax-free growth, you give up capital gains treatment on the way out. Someone who buys a stock in a taxable account and holds it for a decade may pay 15% on the gain when they sell. The same investor holding the same stock inside a traditional IRA pays their ordinary rate on the full withdrawal, which for many working-age or higher-income retirees will be 22%, 24%, or more. Whether the IRA still comes out ahead depends on how long the money compounds and what your rate looks like when you withdraw. For most retirees taking distributions in a lower-income year, the deferral wins. For someone withdrawing during peak earning years, it can be a closer call.
When Part of a Withdrawal Comes Out Tax-Free
Not everyone gets to deduct their traditional IRA contributions. If you or your spouse has access to a workplace retirement plan and your income exceeds certain thresholds, your deduction is reduced or eliminated. For 2026, the deduction phases out between $81,000 and $91,000 of modified adjusted gross income for single filers covered by a workplace plan, and between $129,000 and $149,000 for married couples filing jointly when the contributing spouse is covered.6Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 You can still contribute, but the money goes in after-tax.
When your IRA holds a mix of deductible and non-deductible contributions, the tax math on withdrawals gets more complicated. The IRS does not let you cherry-pick which dollars come out first. Every distribution is treated as a proportional blend of taxable and non-taxable money based on the ratio of your after-tax contributions to your total IRA balance. If 20% of your combined IRA balance consists of non-deductible contributions, then 20% of any withdrawal is tax-free and the other 80% is taxed as ordinary income. This calculation is reported on Form 8606, which tracks your non-deductible contribution basis over time.7Internal Revenue Service. About Form 8606, Nondeductible IRAs
Note what this exception is not: it is still not capital gains treatment. The tax-free slice recovers money you already paid tax on before it went into the account. The rest of the withdrawal, including all growth, remains ordinary income.
This is where people get tripped up. If you made non-deductible contributions years ago and lost track of your basis, you risk paying tax on money that was already taxed. Keep your Form 8606 filings. Reconstructing a basis you cannot document is a headache the IRS is unlikely to resolve in your favor.
State Taxes on Distributions
Federal tax is only part of the bill. Most states also tax traditional IRA distributions as ordinary income at their own rates, which range from roughly 2% to over 13% depending on the state and your income level. A handful of states have no income tax at all, and some offer partial exemptions for retirement income once you reach a certain age. Check your state’s tax agency for the rules that apply to your situation.
The Bottom Line
Capital gains rates and traditional IRAs simply do not intersect. Inside the account, gains are not taxed at all. Coming out of the account, gains are taxed as ordinary income. The only portion of a withdrawal that escapes federal tax is a proportional return of any non-deductible contributions you tracked on Form 8606. If you were counting on 15% long-term capital gains treatment for a big IRA distribution, the number to plan around is your ordinary bracket instead.