Will a loss on securities or crypto be permitted to offset early withdrawal penalties?

[junco26]

I have significant (for me) losses from stocks and cryptocurrency. If I have an early retirement account withdrawal, I know there is a 10% penalty.   Will my losses count toward reducing my total taxes regardless of the penalties? 

My thinking is that since I already have taken the losses, in early 2022, if I do an early withdrawal from a 457b plan and have the ten percent penalty, that penalty will in effect be reduced by my losses. Is that correct?

 I am weighing my options, have not done it yet. Please try and refrain from insisting its a horrible idea to withdraw from the retirement accounts, because that will only happen if absolutely necessary! 

Thanks!

[ThomasM125 · Accepted solution]

Your penalty will not be reduced by your losses. It is a separate tax that is not associated with your taxable income. You would have to pay it even if you had no taxable income.

The loss on  cryptocurrency is deductible against other investment gains and up to $3,000 of non-investment income, so it may help reduce the tax you pay on your pension distribution, but not the penalty.