IRS guidance invoking section 1.408-11 of the tax code means that that a code-2 distribution for a return of the 2022 excess contribution needs to include the attributable loss. In other words, the return of the $3,600 contribution will be accomplished by a code-2 distribution of $3,524.50. (The assumption here is that you either filed your 2022 tax return by the April 18, 2023 due date or you requested a filing extension by that date, otherwise it's too late to request a return of contribution before the due date of your 2022 tax return.)
"But the main question is, if they combine the 2022 and 2023 distributions on a single form, should box 2 still show the $125.60 gain (from 2023)? Or should it show combined net gain/loss for both years, which would show a gain of $50.10? Box 1 would show the same value of $5450.10 either way."
That's a question that has come up on this forum before. If I remember right, the last time I saw a post about this situation the Form 1099-SA showed just the gain in box 2, not reduced by the loss. ($125.60 in your case.) This makes sense if the return of the 2022 contribution was the only contribution being returned, the loss could not be used to reduce taxable income. The Form 1099-SA reporting the combined distributions simply sums the amounts in the respective boxes that the Forms 1099-SA would have had if not combined on a single form.
