Tax Benefits of a Cryptocurrency IRAStaff Writer
Cryptocurrencies make a great investment but just like stocks and bonds, they are subject to capital gains tax. However, if you invest in the cryptocurrency inside a Cryptocurrency IRA, and depending on whether you establish a Traditional or Roth IRA, your tax liability is limited to income tax, not capital gains.
There is no question that cryptocurrencies have been booming in 2021, with their overall market valuation now over $2.3 trillion. That’s a nearly three-fold increase from a market that was worth less than $800 billion at the end of 2020. A similar boom occurred back in 2017, and while the market suffered a mild retraction afterward, it was soon back in the green.
Large rallies such as these are often criticized for their sharp corrections, but in the long-term, prices have been shown to enjoy exponential growth. In fact, over the past ten years, Bitcoin has been proven to be more profitable than any other investment on the market. For this reason, cryptocurrencies like Bitcoin look set to make great long-term investments, particularly as a retirement hedge against deflationary fiat currencies.
Death and Taxes
When speaking of retirement investments, one can’t help but think of Benjamin Franklin’s famous quote: “Nothing is certain but death and taxes”. That’s certainly applicable to both cryptocurrency and almost all retirement plans, as both are subject to taxation.
Back in 2014, the IRS officially declared that Bitcoin and certain similar digital assets would be deemed property, and therefore subject to capital gains tax. This gives the government the right to claim a percentage of any profits made through cryptocurrency investing, just as it would with stocks and bonds.
Fortunately, the same rule also deems that you can reduce these taxes by investing in cryptocurrencies using a self-directed IRA, and either defer the taxes until distributions from the IRA are taken, or in the case of a Roth IRA, potentially eliminate taxes on gains entirely. This can be done in a number of different ways, each providing significant tax benefits which we will discuss here.
Taxes on Cryptocurrency
Reducing or eliminating the amount of income tax you have to pay on your cryptocurrency investments is the key advantage of using a Cryptocurrency IRA. Many new investors in the cryptocurrency space are unaware of the amount of capital gains tax they have to pay on their investments, and often get caught out at year-end for not properly reporting their profits.
If you intend to hold your crypto investments for a long time in order to maximize profits, then a cryptocurrency IRA is the ideal way to reduce your tax overhead. In addition to the handsome tax savings, you aren’t required to report any individual transactions made within your IRA, eliminating the need to keep detailed records of your investment activity.
With the tax deferral benefits of a Traditional Cryptocurrency IRA, you can maximize the profits you make by deferring the distributions from the IRA until you are no longer working, and earning substantial income, when you most likely would then be in a lower tax bracket. Having your cryptocurrency inside your IRA also helps you to avoid panic selling or spending on frivolous purchases, although buying and selling cryptocurrency inside your IRA can be accomplished quickly with a simple phone call.
Cryptocurrency IRA Taxes
With a self-directed Cryptocurrency IRA, you can choose either a Traditional IRA or a Roth IRA. These are the two most common types of IRAs, and they each offer significantly different tax benefits.
In short, with a Traditional IRA, you make investments with pre-tax dollars but pay income tax when you take distributions. If you wait until you are at least 59 1/2, you will avoid the penalties associated with early withdrawals. With a Roth IRA, you contribute after-tax dollars and are not taxed on the growth provided the Roth IRA is held for the required period of time (talk to your tax professional about that). Depending on your investment strategy, these options offer different advantages.
As long as you are working and earning income, you can contribute to your Traditional, Roth, SEP or SIMPLE IRA. The IRS sets the amount you are eligible to contribute annually each year. For a Traditional or Roth IRA, the amount of your eligible annual contribution is based on your age. For 2021, if you are under age 50, you can contribute $6,000 annually, and $7,000 annually if you are 50 or older. You can also rollover funds from an existing qualified plan, or transfer funds from an existing IRA, without limit. SEP and SIMPLE IRAs have different rules and contribution limits, so it would be a good idea to talk to your tax professional if you are interested in these more complex options. In any event, you can truly capitalize on the early growth of cryptocurrencies by getting started as soon as possible, and ultimately mitigate the tax liability by utilizing a Cryptocurrency IRA, generational wealth is entirely possible by investing now and investing wisely.
Another one of the key reasons that some investors choose a Cryptocurrency IRA is diversification. While traditional stocks and bonds may seem like safer options, they typically offer relatively conservative returns compared to cryptocurrencies. If you look at the investment portfolios of some of the world’s most famous investors, you’ll see that they always rely on diversification to ensure they have an equal balance of risk and safety. This requires keeping a large percentage of funds in a low-risk fund while also taking advantage of riskier investments that offer potentially higher returns.
By diversifying a portion of your existing retirement fund into a Cryptocurrency IRA, you can take advantage of Bitcoin or other crypto‘s spectacular returns while keeping the majority of your investment in a less volatile environment. Additionally, new evidence suggests the cryptocurrency market is becoming less correlated to traditional stocks, offering a potential safe haven in the event of a financial crisis.
Reduce Your Taxes Today with a Cryptocurrency IRA
Investing in cryptocurrency has proven to be a highly profitable choice for thousands of companies and individuals around the world. When investing through a safe financial product like an IRA, you not only receive beneficial exposure to the price gains but also the security of a well-trusted and licensed custodian.
Coin IRA provides an easy method of investing in cryptocurrency via an IRA. You can do this in several ways: by rolling over all or part of an existing 401(k) into a Cryptocurrency IRA; transferring all or part from an existing IRA into a Cryptocurrency IRA; or making your allowable annual contributions to your Cryptocurrency IRA.