The typical IRA is funded with before tax dollars - meaning you did not pay taxes on that money you put in the IRA. So when you take it out that is when you will pay taxes on it, and you pay taxes only on the amount taken out.
So if you deposit $10,000 into the IRA you did not pay taxes on that $10,000 from the start. Later it's only worth $5000. So you close it out and take the $5000 distribution. That distribution is taxable. Period. If you take it out before retirement age it's also subject to a 10% early withdrawal penalty.
