You make the call

Question: John, age 52, has a traditional IRA worth $100,000. His basis in the IRA is $0 (that is, all contributions were tax deductible). Also, in 2022 he incurred a large capital loss in other non-IRA accounts from a poor investment, which resulted in a $100,000 capital loss carryover to 2023. John’s neighbor, Jay, suggested he convert his IRA to a Roth IRA before the end of this year so John can offset the entire $100,000 in income that would normally be recognized in the conversion with the capital losses carried forward from 2022. Is Jay correct?

Answer: No. The Roth IRA conversion represents ordinary income [§408(d)(1), IRS Pub 590-B] while capital losses are only deductible against gains from capital assets [§1211(b)]. If there are no capital gains to offset the capital loss carryforward, the taxpayer is allowed a deduction of $3,000 ($1,500 if married filing separately) against other income [§1211(b)(1) and (2)], but the remainder of the capital losses will be carried forward to 2024 and beyond. The Roth conversion will be fully includable as income. Assuming no other capital gains, $3,000 will be allowed as a capital loss deduction and $97,000 of the capital loss will be carried forward to 2024.