Capital gains and losses inside an IRA have no immediate tax effect. The IRS ignores what happens inside the account: you can sell a stock at a profit, realize a loss, collect dividends, or rebalance the whole portfolio without any of it showing up on your tax return. Taxes only enter the picture when money leaves the account, and at that point the character of the gain no longer matters. Every dollar coming out of a Traditional IRA is ordinary income, and every qualified dollar coming out of a Roth IRA is tax-free. The flip side is that losses inside an IRA are not deductible, and gains that would have qualified for lower long-term capital gains rates in a taxable account lose that preference on the way out of a Traditional IRA.
Gains Inside the Account Are Invisible to the IRS
Short-term gains, long-term gains, dividends, and interest all receive the same treatment inside an IRA: none, until you take a distribution. The account is treated as a single tax-sheltered unit, and internal transactions do not generate reporting obligations. 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 may still show realized gains and losses on your statements, but those numbers are informational only.
In a Traditional IRA, this means decades of compounding without the annual drag of taxes on dividends or realized gains. In a Roth IRA, qualified withdrawals eventually come out tax-free, so the gains are never taxed at all.
The practical benefit is freedom to manage the portfolio. Selling a winner to rebalance, rotating sectors, or trimming a concentrated position inside an IRA creates nothing for the IRS. In a taxable brokerage account, the same moves create reporting and often a tax bill.
Why Losses Inside an IRA Are Not Deductible
If an investment inside your IRA drops 40% and you sell it, that 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 loss exists only inside the IRA.
The reasoning tracks the structure of the account: contributions were already given favorable treatment going in — a deduction for Traditional contributions, or future tax-free growth for Roth contributions — so allowing a second benefit for losses on the holdings would be a double benefit. The IRS treats the account wrapper as the taxable unit, not the individual securities held within.
This surprises investors who are used to tax-loss harvesting. In a taxable brokerage account, realized capital losses first offset realized capital gains, and any remaining net loss can reduce ordinary income by up to $3,000 per year ($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 machinery exists for transactions inside an IRA. Losing investments hurt your balance and give you nothing on your return.
That asymmetry is worth remembering when deciding what to hold where. A highly speculative position in a taxable account at least produces a usable loss if it falls apart; the same position in an IRA does not.
The Wash Sale Trap Between a Taxable Account and an IRA
Here is a place where an IRA can actively damage a tax situation rather than simply failing to help. 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 In an ordinary wash sale between two taxable accounts, the disallowed loss gets added to the cost basis of the replacement shares, so the benefit is deferred rather than destroyed.
When the replacement purchase happens inside an IRA, the result is worse. The IRS has ruled that buying substantially identical stock in your IRA or Roth IRA within 30 days of selling at a loss in a taxable account triggers the wash sale rule and disallows the loss.4Internal Revenue Service. Revenue Ruling 2008-5 – Loss From Wash Sales of Stock or Securities Because the replacement shares sit in a tax-advantaged account, the usual basis adjustment under Section 1091(d) does not run to the IRA. The loss is permanently gone. You will not recover it on any future return.
The trap catches investors who sell a losing stock in their taxable brokerage account to harvest the loss and then buy the same stock in their IRA to keep the exposure. The 30-day window applies in both directions, so buying in the IRA shortly before selling in the taxable account triggers the same result. If you want to harvest a loss in a taxable account, avoid purchasing the same or substantially identical security in any IRA you own for at least 31 days on either side of the sale.
What Happens When the Money Comes Out
Taxes on an IRA arrive at distribution. The custodian reports every distribution to you and the IRS on Form 1099-R, with 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
For a Traditional IRA funded entirely with deductible contributions, every dollar of a distribution is taxed as ordinary income. The composition of the growth is irrelevant. A long-term gain that would have been taxed at 0%, 15%, or 20% in a taxable account loses that preferential rate on the way out of a Traditional IRA and is taxed instead at your marginal ordinary income rate, which for 2026 can reach 37%.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 That rate conversion is the price of decades of tax-deferred compounding.
Distributions before age 59½ are generally subject to an additional 10% early withdrawal tax on top of ordinary income tax, though 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
Starting at age 73, required minimum distributions force money out of the account whether you want it or not, and each RMD is taxed as ordinary income.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The IRS eventually collects on the deferred growth either way.
Roth IRA
Qualified Roth distributions are completely tax-free. To qualify, the Roth IRA must have been open for at least five tax years, and the distribution must occur after you reach age 59½, become disabled, or pass to a beneficiary.9Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs When those conditions are met, contributions and decades of accumulated gains both come out free of federal income tax.
If a Roth distribution is not qualified, the earnings portion is taxable as ordinary income and may trigger the 10% early withdrawal penalty. Contributions themselves can always be pulled out tax-free and penalty-free because they were already taxed before going in. Roth IRAs also carry no RMDs during the original owner’s lifetime, so the tax-free growth can continue as long as you live.
What About Losses on the IRA as a Whole
Many articles still describe a situation where closing all of your Traditional IRAs (or all of your Roth IRAs) and receiving back less than your total after-tax basis produces a deductible loss. That mechanism no longer works.
The loss, when it existed, was never a straightforward write-off. It was treated as a miscellaneous itemized deduction subject to the 2% adjusted gross income floor, available only to taxpayers who itemized and only to the extent it exceeded 2% of AGI.10Internal 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 on August 5, 2025, made the elimination permanent.11Internal Revenue Service. One, Big, Beautiful Bill Provisions
There is currently no mechanism to deduct a loss on a liquidated IRA. After-tax contributions that are not returned to you simply disappear from a tax perspective, which makes tracking basis on Form 8606 and the investment performance of the account itself the only real protection for nondeductible contributions.12Internal Revenue Service. About Form 8606, Nondeductible IRAs
The Short Version
Inside the account, the IRS does not see gains or losses. Trade freely, rebalance, take profits, cut losers: none of it is reported, and none of it is deductible either. The reckoning comes at distribution. Traditional IRA money comes out as ordinary income regardless of what produced the growth. Roth IRA money, if the distribution is qualified, comes out tax-free. And if you harvest losses in a taxable account, keep the matching purchase out of your IRA for at least 31 days on either side of the sale, because the wash sale rule will destroy the loss rather than defer it.