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The MDTAXES Network is an affiliation of CPAs that specialize in the tax planning and preparation for young health care professionals. Please leave your questions or comments for our CPAs, who visit the message board regularly, or review the answers, suggestions and ideas posted in response to your colleagues' questions.
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According to IRS Publication 590 on IRAs (available at www.irs.gov):
There is a paragraph on page 62 of that publication that addresses how to recognize losses on your investments within your Roth IRAs:
"If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions in your Roth IRA. You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit."
That means that the loss in your Roth will be deductible to you to the extent the total of your Roth losses and your other miscellaneous itemized deductions exceed 2% of your income, and only if you itemize your deductions. Also, since miscellaneous itemized deductions aren't deductible under the Alternative Minimum Tax, make sure you won't be subject to the AMT the year you clean out your Roth accounts.
Finally, taking losses is great, but taking money out of your Roth IRA will reduce the amount of money you have growing tax-free. So give some careful thought as to the long-term implications of this strategy.
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Replying to:
Since the market downturn I have lost a substantial amount in my Roth IRA. I don't expect many of these stocks to return to the original purchase price. I had assumed that since it was in my Roth, I cannot take a capital loss on my taxes. However, I recently read that you can cash out your Roth, take the capital loss on your taxes, and restart your Roth fresh with a new account. Is this true? How would you account for that on your tax return? Thanks. 
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