If you’re planning for retirement, you likely have some sort of Individual Retirement Account (IRA). An IRA is a long-term investment account that provides tax benefits for retirement savings. The two most common IRAs are Traditional IRAs and Roth IRAs. The main difference between the two lies in the timing of their tax advantages. Most IRAs prefer low-risk investments such as CDs, mutual funds, ETFs, stocks, and bonds to safeguard their nest egg. Lately, however, interest in popular cryptocurrencies and crypto assets has grown tremendously and investors are looking for ways to save on their capital gains taxes, as well as plan for the future. A crypto IRA might be something to consider if you’re unfazed by the high volatility and lack of regulation in the market.
Self-Directed Cryptocurrency IRAs
IRAs can own Bitcoin and other cryptocurrencies. A Crypto IRA is another name for a self-directed IRA. Self-directed IRAs allow you to invest in a broader – and potentially riskier – portfolio of alternative assets than is permitted by most IRA custodians, including cryptocurrencies. A self-directed crypto IRA, which can be either a Traditional IRA or Roth IRA, allows you to invest in the digital assets you know best. You can invest in a crypto IRA by either investing directly with your IRA or setting up a single-member LLC in the name of your IRA. To get started, you’ll need to create an account with a custodian (cryptocurrency exchange) that offers the cryptocurrencies you wish to invest in. While some providers only offer Bitcoin and Ethereum, others offer altcoins and other tokens.
A major benefit of investing in a self-directed crypto IRA is tax savings. A Traditional crypto IRA offers immediate tax savings because your crypto contributions are tax-deductible, and you defer paying taxes on any gains until you draw funds out at retirement. Upon retirement, your withdrawals are taxed as ordinary income. In a Roth Crypto IRA, you invest with money that has already been taxed, and although you don’t get a tax deduction as you do in Traditional IRA, your profits come out entirely tax-free at retirement (age 59.5 or later). If you believe in the potential of blockchain technology and cryptocurrencies, then a self-directed Roth IRA might be the best option for you because any appreciation in your portfolio will be tax-free.
A crypto IRA helps you avoid the complexities of tracking and calculating your trades. If you’ve been dabbling in the crypto market, you already know that it can be a bookkeeping nightmare to stay on top of all of your transactions. In addition to tracking your transactions, you have to complete numerous tax forms, including 1040, Schedule D, and Form 8949. Again, because the IRS treats cryptocurrency as property, your gains from individual sales or exchanges are typically subject to capital gains tax – that is unless you are holding your crypto in an IRA account. For more information on reporting requirements refer to our Cryptocurrency Taxes and IRS Tax Enforcement article. Because your IRA funds are either tax-deferred or tax-free, your individual transactions within your IRA account do not require reporting to the IRS. This also means that you don’t need to track your cost basis for any of the transactions that you make.
Investing in crypto can diversify your retirement portfolio and maximize potential returns. As with all investments, it’s best not to put all your eggs in one basket. Considering the returns we’ve seen in the crypto market over the years, the potential benefits of similar returns may be worth the added risk that comes with the current state of the market.
Take Caution with Cryptocurrency IRA’s High Volatility
When deciding on the right crypto IRA for you, you have to take into consideration your financial situation and risk tolerance. There is an adage in any risky alternative investment – don’t invest anything that you can’t afford to lose. While crypto and virtual currency investments have been extremely profitable for some investors, the crypto market is extremely volatile. However, with high volatility comes the potential for huge gains. The market is also widely unregulated which tends to attract scammers, increasing the risk of your account getting hacked and your cryptocurrencies and digital currencies getting stolen. In most cases, retrieving stolen crypto is impossible.
If you’re interested in a crypto IRA, our team at Gordon Delic and Associates can help you navigate the rapidly evolving cryptocurrency and blockchain space and answer any questions that you may have. Contact us or call us at (208) 900–9509.