Digital currency as a whole is still a relatively new investment
. With a new asset class comes new opportunities to learn and grow as an investor. One aspect of cryptocurrency investors may not be aware of is the possibility to hold these currencies in a self-directed retirement account, such as a Traditional IRA or Roth IRA.
You might wonder, “Why would I want to hold my cryptocurrency in an IRA? What are the benefits?”
The benefits of investing in cryptocurrency in a self-directed IRA will vary for each investor, depending on what he/she considers to be important, but here are three benefits to holding digital currency in an IRA.
3 Benefits of investing in digital currency in an IRA
1. Potential tax advantages
What some first-time digital currency investors might not be aware of are the tax implications surrounding cryptocurrencies, or if you’re experienced you might recall your initial reactions. The IRS treats cryptocurrencies similar to property for tax purposes.
However, the government established retirement accounts (such as a Traditional IRA or Roth IRA) to help individuals save for their retirement in a tax-advantaged environment. Depending on the account, and ensuring IRS guidelines are followed, investments within these accounts can grow either tax-deferred or tax-free. This is one benefit of using an IRA for cryptocurrency investing.
A main difference between a Traditional IRA and Roth IRA is whether the taxes are paid before or after the contribution.
Traditional IRA: Contributions are made pre-tax. This offers the account holder the ability to take a tax deduction before contributing to the account, meaning all funds in the account are tax-deferred and no taxes are paid until the funds are withdrawn.
Roth IRA: Contributions are made after taxes are paid. This means the account holder does not get a tax-deduction on the contribution. However, when funds are withdrawn, no taxes need to be paid on the cash/assets (if all rules are followed).
Digital currency investors have the ability to hold cryptocurrency assets in a Traditional IRA
or Roth IRA
with Equity Trust.
2. Short-term/long-term capital gains and cost basis calculation
Typically, sales and purchases of stocks, bonds and mutual funds are subject to short-term and long-term gains tax, and cryptocurrency is not an exception to this…unless you are holding the asset in your IRA.
Because IRA funds are either tax-free or tax-deferred, individual purchases and sales within your IRA do not require reporting to the IRS for short-term or long-term gains. The need to track cost basis for your individual transactions is eliminated.
As mentioned earlier the IRS treats cryptocurrency similar to real estate and referenced this in Notice 2014-21, which stated “virtual currency is to be treated as property for US Federal tax purposes.”
This means that income made from the sale of Bitcoin, Ethereum or other cryptocurrencies you invest in is subject to short-term taxation or long-term capital gains rates, just like a property investment would be. Significant gains in the value of the investment could cause taxation by the IRS
3. Portfolio diversification
Investing in cryptocurrency in an IRA could add diversification to your portfolio. Equity Trust offers the ability to invest in a wide variety of assets including real estate, private entities, promissory notes, precious metals and many others, all in one account.
If you’re interested in learning more about digital currency investing in your IRA, download our free, comprehensive guide that will explain the currencies available on our digital asset platform, platform security for trading, as well as how you can get started.
Hypothetical example: purchasing bitcoin outside of an IRA vs. inside an IRA*
Download the guide to digital currency
to discover how it's possible.
Prior to making any investment decisions, please consult with the appropriate legal, tax, and/or investment professionals for advice. As a self-directed IRA custodian, ETC will not provide investment advice or risk assessment of any investment. The digital currency market may experience a high degree of volatility and clients should consult with an investment professional before any investment is made.
*Hypothetical example shown is for illustrative purpose only. Investing includes risk, including possible loss of principal.