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Yes, when you actually make a withdrawal from the IRA the withdrawal will be taxable income. The plan administrator will send you a Form 1099-R for the tax year when the funds were withdrawn. You report the Form 1099-R on your federal tax return.
When you take a withdrawal it is not broken out by sales, interest, dividends etc. It is taxed as ordinary income and you won't get any capital gains treatment on it. That is one of the disadvantages to Traditional IRAs.
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