IRA investment loss

[NCperson]

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

[dmertz]

@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.

[Kay Cee]

But there would be no loss in the IRA if the amount withdrawn from the IRA (and immediately becoming taxable) was the same as the original investment amount.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?

[Kay Cee]

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.

[RobertB4444]

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 

[dmertz]

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.

[Kay Cee]

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?

[dmertz]

"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.