IRA investment loss

[genman]

In 2016 I invested a large amount of money in a company with my self directed IRA funds. They made monthly interest only payments on the invested money to my IRA until the end of 2022.  They stopped paying the beginning of 2023 and filled for bankrupt the end of 2023.  There are no assets to recover so I have lost all the money invested.  How can I deduct the lost money on my taxes now and/or in the future?  I use Turbo Tax Home and Business.

[VolvoGirl]

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

[genman]

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.

[VolvoGirl]

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.      

[genman]

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? 

[VolvoGirl]

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 

[genman]

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?

[VolvoGirl]

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

[genman]

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.

[genman]

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?

[VolvoGirl]

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.

[dmertz]

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.

[genman]

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?

[VolvoGirl · Accepted solution]

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