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I believe that when you convert an IRA to a Roth IRA you pay income tax on the entire value of the IRA that you have not already paid income tax on. This includes both any gains that you have earned as well as any principle that you were able to put in without paying taxes on it. Last year I ended up with a situation similar to yours. My IRA was around $6,000, $4,000 in input from me and $2,000 in earnings. When I converted it to a Roth IRA last winter, I payed income tax on all but the $1,800 I had already paid income tax on (due to income levels, I couldn't put in the full $2,000 my second year tax-free).

Hope this helps.
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