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But there would be no loss in the IRA if the amount withdrawn from the IRA (and immediately becoming taxable) was the same as the original investment amount.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

[eastlandtax]

VolvoGirl, what about the situation where a 68 year old taxpayer rolls over $150,000 in a 401K to an IRA in 2018.  The contract is that the whole amount is invested by the fiduciary into an investment that pays $6,000 per year in distributions described as "interest on investment."  Initially, the distributions are made regularly but then they stop in the year that the IRA purchaser is required to take an RMD.  But there is no money left in the investment and he does not get the RMD.  The fiduciary sends emails to investors makes a very circular argument that the investment will come back but a sober reading makes it clear that the investment is bankrupt.  Meanwhile, the taxpayer is subject to penalties because there is no way to take an RMD.  As time goes on, it is clear there is no money left in the IRA.  How can the taxpayer obtain abatement of the penalties the IRS has imposed?

[NCperson]

@eastlandtax can you add the dollars involved? 

Let's say the investment of $150,000 declines in value to $1,000 as of 12/31/22 at which time the 68 year old who originally made the rollover to the IRA is now 73 and subject to RMD.   In 2023, the RMD is based on the 12/31/22 value and divided by 26.5 from the IRS IRA table.  That means the RMD is now $38.  And before that RMD is distributed, the value of the IRA goes to zero. 

What penalty would the IRS assess on $38 - is that the question? is that the magnitude of dollars under discussion?