Potential Benefits of Cryptocurrency Investing in an IRA
Cryptocurrency – or digital currency – 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 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.
3 Benefits of investing in cryptocurrency in an IRA
1. Potential tax advantages
What some first-time cryptocurrency 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to the account, meaning all funds in the account are tax-deferred and no taxes are paid until the funds are withdrawn.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 However, when funds are withdrawn, no taxes need to be paid on the cash/assets (if all rules are followed).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.
purchasing bitcoin outside of an IRA vs. inside an IRA*
2. Short-term/long-term capital gains tax savings
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 cryptocurrency investments 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 – that is, when it’s not inside a Traditional or Roth IRA.
3. Portfolio diversification
Another potential benefit of investing in cryptocurrency in an IRA is that it 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 through our cryptocurrency providers as how you can get started.
Cash funds can be transferred via check or wire. All other assets are transferred either ACATS or non-ACATS.
How do I set up a self-directed retirement account?
To set up a self-directed retirement account with Equity Trust visit myEQUITY and start the process today. You can also visit How to Get Started for more information. Or simply schedule a free, one-on-one consultation with an Equity Trust Senior Account Executive.
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.
Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional. Equity Institutional services institutional clients of Equity Trust Company. Brokerage Services Available Through ETC Brokerage Services, Member SIPC, and FINRA. *Founded in 1974 | Self-Directed IRA Custodian since 1983. The predecessor business to Equity Trust Company was established in 1974 and the IRS approved as a custodian in 1983. **Assets under custody as of 8/31/2021.
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