Interest in cryptocurrencies has grown significantly over the last year, with the price of bitcoin — the biggest by market capitalization — jumping to a new high in November 2021. Moreover, according to Case Bitcoin, bitcoin has surpassed all other asset classes to become the best-performing financial asset in history.
BTC hit $1.00 in February 2011, establishing parity with the U.S. dollar for the first time. If you had invested $1,000 back then, you would have received 1,000 Bitcoins. Bitcoin is trading at $46,762 as of December 14, 2021. As a result, your portfolio would now total $46.76 million.
When you trade bitcoin, you are liable to capital gains taxes. Now, you may be wondering how to invest in cryptocurrencies and save taxes at the same time?
The answer is a self-directed Individual Retirement Account (IRA). However, please consider that cryptocurrencies have a history of being very volatile and expose investors to a unique set of risks due to their lack of regulation by governments or other financial institutions.
If you’re interested in investing in a bitcoin IRA, though, continue reading to determine your best course of action.
What Is a Bitcoin IRA?
A Bitcoin IRA is a self-directed IRA that enables participants to invest in nontraditional assets such as cryptocurrencies, real estate, and commodities. A self-directed IRA can be either a Roth IRA or a traditional IRA.
While Bitcoin IRAs are a fantastic way to diversify a retirement portfolio, they are also considered high-risk investments that have the potential to either increase or distort a retirement portfolio’s performance.
For 2021, the usual IRA contribution limitations apply to $6,000 for those under 50 and $7,000 for those 50 and over.
How Are Bitcoin IRAs Taxed?
IRA earnings are either tax-free or tax-deferred. This depends on the kind of self-directed account used to invest:
- Traditional IRAs: Individuals who contribute to a traditional crypto IRA can deduct their annual contributions from their taxable income, which means they will not be obliged to pay income taxes on their earnings until they withdraw their assets. Withdrawing funds early or before attaining retirement age entails both a penalty and a tax payment.
- Roth IRAs: Roth IRAs do not provide a tax deduction for contributions. During retirement, withdrawals from a Roth IRA are tax-free since the tax payment is made up front, leaving no obligation at maturity. Roth crypto IRAs are ideal for those who want to enjoy tax-free withdrawals in the future.
According to IRS Notice 2014-21, bitcoin and other cryptocurrencies are treated similarly to stocks for evaluating tax liabilities. Consequently, capital gains taxes would apply to any profits or losses generated from the sale of any cryptocurrency.
When someone sells or trades their cryptocurrencies and makes a profit, taxes must be paid to the government. For instance, if a person buys bitcoin for $5,000 and later sells it for $7,500, they must declare the $2,500 profit to the IRS and pay taxes on the $2,500 gain. If a cryptocurrency is sold at a loss, the loss may be deducted from the taxpayer’s tax liability.
Advantages of Bitcoin IRAs
The following advantages are associated with Bitcoin IRAs:
- Diversification: As an investor, it is critical to diversify your holdings to maximize growth potential and minimize the risk associated with each class. Additionally, as previously stated, bitcoin has historically generated enormous returns for investors, making it an excellent addition to one’s retirement portfolio.
- Tax Benefits: While both traditional and Roth crypto IRAs provide tax advantages, the timing of those advantages differs. A traditional crypto IRA provides immediate tax advantages, whereas a Roth crypto IRA provides future tax benefits.
Top Bitcoin IRAs
The following Bitcoin IRAs could be a great choice for investors looking to diversify their retirement portfolio.
Bitcoin IRA is a self-directed trading platform that enables users to purchase and sell bitcoins inside the boundaries of a tax-favored individual retirement plan.
Funding a new account with Bitcoin IRA requires a minimum investment of $3,000. Due to IRS limitations, individuals cannot move bitcoin assets from another exchange or wallet to their Bitcoin IRA; instead, bitcoin assets must be obtained independently in U.S. dollars.
Since funds stay inside the account, investors avoid capital gains and dividend taxes. Plus, account contributions are tax-deductible.
The bitcoin held in Bitcoin IRA accounts is stored in a BitGo, a cold wallet with 100 percent offline storage that secures users’ cryptocurrency assets from hackers. Additionally, if an individual has at least $10,000 in their retirement account, they can receive up to six percent annual percentage yield on the token, compounded monthly.
Birch Gold Group, a provider of precious metals IRAs, launched BitIRA to meet the needs of investors seeking to diversify their retirement investment portfolios.
A minimum investment of $5,000 is required to fund an entirely new BitIRA account. In addition to the $50 signup fee, users also have to pay $195 for annual account maintenance and 0.05 percent storage fees each month.
BitIRA uses cold storage wallets to prevent hackers from gaining access to funds. The keys are stored in nuclear bunkers, which is monitored 24 hours a day by armed guards. On top of this, a $1 million consumer protection insurance policy and a $1 million cybersecurity insurance coverage are available from the company in case of fraud or theft.
Coin IRA is a subsidiary of Goldco, a well-known distributor of gold and silver IRAs. By offering a straightforward account creation and activation procedure, the company streamlines setting up and establishing bitcoin IRAs.
Individuals on Coin IRA require a minimum investment of $20,000 to establish a cryptocurrency IRA, or $3,500 if funds are transferred from a non-IRA account. Coin IRA’s trading and annual costs are unclear; therefore, it is advised that you contact the company directly.
In terms of insurance, the accounts are insured up to $100 million. Additionally, assets can be securely stored offline, moved to a hard wallet, or directly to the user’s preferred cryptocurrency wallet, among other choices.
iTrustCapital makes it simple to invest in cryptocurrencies through an IRA. Investors can utilize its user-friendly system to purchase and sell gold, silver, and cryptocurrencies.
To open a completely new iTrustCapital account, a minimum investment of $5,000 is necessary. Additionally, users must pay a $29.95 monthly account maintenance charge and a one percent transaction fee on all transactions.
To protect its clients’ investments, iTrustCapital has collaborated with Curv. Curv’s software is designed for institutional use and encrypts an investor’s cryptocurrency keys. This implies that neither a hacker nor iTrustCapital has easy access to the coins’ keys.
iTrustCapital has received positive feedback on Trustpilot and communities such as Reddit. Customers laud the company’s straightforward account creation process, as well as its superior customer support.
BlockMint is the cryptocurrency section of Lear Capital, one of the state’s leading precious metals merchants and providers of precious metals IRAs. While BlockMint is a relatively new firm, Lear Capital has been operating in the investing sector for more than two decades.
BlockMint is a preferable option for people who prefer not to perform their bitcoin transactions and would rather have someone else manage their whole account.
BlockMint mandates a minimum investment of $10,000, as well as a one-time $500 platform registration charge. Furthermore, a 15 percent transaction charge is imposed on each transaction, which is relatively high compared to other platforms. On top of all of this, there is a $195 annual maintenance charge and a monthly storage fee equal to 0.05 percent of the value in the investor’s account.
Investing in a Bitcoin IRA makes sense only if you’ve thoroughly examined your risk tolerance and determined that you can tolerate large fluctuations. Additionally, weigh the expenses of investing in a Bitcoin IRA versus the tax benefits.
While some financial specialists enthusiastically urge cryptocurrency purchases, others advise investors to avoid the Bitcoin market entirely. On the other hand, investing in cryptocurrencies may yield big profits in the future and act as a hedge against losses in other markets.
So, after amassing conventional retirement funds, it is wise to begin with a modest bitcoin IRA investment.