IRA investment loss

Did you take the IRA deduction for the contribution?  Then you already got the benefit of deducting it from your income.  You get the loss by never claiming the IRA as income.   And after 2017 a IRA Loss is no longer deductible

I'm confused.  I invested money that was in my  traditional self directed IRA account with this Company in 2016. They made monthly interest only payments to my IRA.  I withdrew that money from my IRA and paid taxes on the money each year.  Then in 2023 they completely stopped making payments and then filled for bankruptcy.  So now I've lost all the "principle" amount of money.  That lost money is what I want to be able to use as a tax deduction.

I know there is a way to deduct money lost in the stock market up to I think $3000 per year.  Is there something like that available for my situation?

Thanks.

When you originally invested the principal did you take the IRA deduction on your tax return back in 2016?  If you did you already got the deduction for it.  You can't deduct the loss.  It was never included in your income in the first place.  You don't have a cost basis in the IRA like you have when you buy stocks.      

So if I understand what you're saying.   I put money in my traditional IRA back many years ago and therefore didn't pay income taxes on that money going into the account.  Then I use some of that money and invest it in a Company.  The Company pays interest into my account on that loan.  I pay taxes on the money I take out.  So far this is all standard.  But now the Company goes bankrupt and the money I invested in them is lost.  You're saying, That lost money is just gone and I can't even deduct any of that investment loss on my taxes? 

So is your IRA account zero?  Or do you still have other money left in it?  You get the loss by not having to report it as income.  You will just have less income to pay tax on when you take a distribution.  

I'll page someone who might know more or can explain it better  @dmertz 

I still have a small amount of money remaining in my IRA account.  Most went to invest in this company.

So because the money I used to invest in this company was from my traditional IRA account, I can't deduct the lost money from my taxes?  If I had used already taxed money from say my savings account, and it was lost, Then I could deduct the loss on my taxes.?  Is that correct?

Yes you can  deduct a personal  investment loss  that's outside of the IRA.  

Wow!  What a big difference.  I just have to eat the total loss.  I wish I hadn't used my IRA money for the investment. I could have had a deduction for many, many years.

Thanks for your help.

I'm curious, If I had lost this investment money and it was with after taxed funds, how much could I deduct from my taxes?

If you have investment sale losses, after you subtract the losses from your gains you can only deduct up to 3,000 per year.  The rest you carryover.

Then each year you first offset the loss against any gains you have each year so that can use more of it up.  Then after applying the loss to the current gains you can take a max loss of 3,000 (1,500 MFS)per year.

Losses in a traditional IRA mean that you simply have less that will be taxable in the future.  Taking a deduction for the loss of this pre-tax money would be double-dipping.

Is the $3000 max deduction for investment losses per year directly off of the tax you owe or is it $3000 deducted off of your gross income?

Just off the income.  So it's only a percentage off the tax.  

Did your SDIRA custodian already value the asset at zero? If the custodian still values the asset at the original investment cost, might you be able to withdraw it from the SDIRA at that original value, pay the taxes on the income accordingly, but then take a big loss outside of the IRA against ordinary income?

@Kay Cee effective with the 2017 tax law changes, losses within an IRA are not tax deductible outside the IRA. 

@Kay Cee , the investment would have to be distributed from the IRA in-kind to acquire a cost basis equal to the taxable amount.  However, my understanding is that with a SDIRA the IRA owns an LLC which owns the investment.  I'm not sure that the investment can be distributed in-kind from the IRA if it's not the IRA that owns the investment.  I don't know if the LLC itself can be distributed in-kind.

But there would be no loss in the IRA if the amount withdrawn from the IRA (and immediately becoming taxable) was the same as the original investment amount. If a loss in value within the IRA was experienced, then of course no loss deduction from that. But, in the scenario I questioned, the loss would be outside the IRA, right?

Common, but my understanding is that not all SDIRAs hold an LLC. That is surely possible and a custodian could hold the LLC in the name of the SDIRA while allowing the IRA owner to make choices within the LLC. But, in some cases, a custodian will hold in an SDIRA alternative investments directly, which could include commodities like precious metals, crypto, or real estate LP shares.

Even if you were able to remove the investment from the account you would need to pay taxes on the amount that you removed as regular income.  Then you would get an equivalent deduction as a long term capital loss.  That would be an extremely poor trade.

@CaseyCMC 

No, it would be a short-term capital loss.  With an in-kind distribution, the holding period begins with the date of the distribution.  The investment has no holding period inside an IRA.

Perhaps I've not phrased the question or trade off very well, so let me try this way.

Suppose I directed $1000 or IRA money into a specific investment which, over time, declined in value to $200. Then, if that specific investment asset was distributed in-kind out of the IRA, what value should be reported on a 1099-R, $1000, $200, or some other value?

Even if there was objective evidence that the specific investment asset had declined in value to $200, what if the IRA custodian refused to recognize that decline in value and reported a $1000 withdrawal on the 1099-R? If the custodian refuses to correct the 1099-R, do I correspond directly with the IRS to demonstrate that ordinary income gained via the withdrawal was only the $200?

If there is no way to have the ordinary income from the withdrawal "adjusted" to $200 even though the asset value is demonstrably $200, I would have $1000 of ordinary income from the withdrawal, which must then become my basis in the asset. When the asset is then liquidated at its $200 real value, I have an $800 loss, right? But is that short-term, because the IRA withdrawal was recent, or long term, because the asset was acquired in the IRA some years ago?

If the income from the withdrawal can be adjusted somehow to $200, then I would have that $200 of ordinary income to report, a $200 basis in the asset, and neither a gain nor a loss if the asset was then liquidated at its $200 real value, right?

"if that specific investment asset was distributed in-kind out of the IRA, what value should be reported on a 1099-R, $1000, $200, or some other value?"

The value reported on the Form 1099-R is the value that the IRA custodian placed on the investment at the time of the distribution.  That value become your cost basis and the holding period begins on the date of the distribution.

The IRS generally places on the IRA custodian the responsibility to value the assets in the IRA.  However, the IRS does recognize that some assets are hard to value and for IRAs containing such assets the IRA custodian is to include the value of those in box 15a and place a code in box 15b indicating the type of asset (e.g., code C for a ownership interest in an LLC that is not traded on an established securities market).

The last two paragraphs are correct.