A Bitcoin IRA is an IRA with Bitcoin or other cryptocurrencies in your wallet. According to the IRS, bitcoins are considered and taxed as property. Some of the advantages of bitcoins are that they diversify their portfolios, are expected to grow in popularity and availability, and can benefit investors with favorable tax treatment. Bitcoin IRAs allow investing in several cryptocurrencies using retirement savings.
Bitcoin IRAs act as self-directed IRAs provided by some financial institutions in the U.S. Department of State, which allows alternative investments to save for retirement. Basically, a person can keep other retirement accounts with traditional investments and participate separately in the self-directed cryptocurrency investment option. Like any IRA, a cryptocurrency is simply a retirement account in which cryptocurrency is invested and stored.
You will face the same standards as if you invested in any other normal asset class, including tax benefits. Some differences include storage, as with any cryptocurrency, your assets are usually stored in a digital wallet and the use of a cryptocurrency exchange in the stock market together with your custodian, the holder of your IRA. A user creates an account on the website or mobile application. This takes less than 1 minute.
In general, a Bitcoin IRA works much like a regular IRA, except that you invest your money in cryptocurrency rather than in mutual fund shares. In the case of IRA accounts that allow you to invest in more than just Bitcoin cryptocurrencies, you will gain greater diversification in terms of the assets with which to diversify. These fees are common in bitcoin IRAs, but it's worth considering if the fees make sense before opening an account. For every purchase of 1 gold on the Bitcoin IRA platform, you will receive the ownership rights to a fine Troy ounce of gold.
Bitcoin IRAs work in a similar way to regular IRAs, except that you invest in what the IRS specifically calls convertible virtual currencies, rather than mutual fund shares. Cryptocurrency and Bitcoin IRAs pose greater risk than traditional investment options, such as mutual funds, stocks and bonds, but they also have the potential to generate higher returns. Crypto IRAs, on the other hand, allow investors to choose from a growing list of providers that act as custodians of the funds in their cryptocurrency portfolio. Spending or withdrawing funds from any IRA account before reaching 59½ years of retirement age will result in tax penalties for early withdrawal.
That means looking for a custodian who will host your self-directed IRA account and allow you to trade cryptocurrency. Opening a crypto IRA is something to consider if you don't mind taking a little risk now in exchange for potentially higher returns later on, as well as significant tax advantages along the way. Investors attracted by the decentralized nature of cryptocurrencies, but wary of their risk potential and a short list of practical uses, have found solace in the number of traditional financial products being created for cryptocurrencies, such as crypto IRAs and tax platforms automated on cryptocurrencies like TaxBit. As you research the custodians of Bitcoin IRAs, remember that you'll want to make sure that the types of accounts, exchanges, and cryptocurrencies available fit your goals.
This is because “Bitcoin IRAs are certainly not configured to accommodate traditional assets such as stocks, bonds and mutual funds,” Blaskey says. These Bitcoin IRAs are covered by custodians who manage self-directed accounts and allow virtual currencies to be among the necessary alternative investments. For example, a Bitcoin IRA company could partner with a particular exchange or could allow you to trade any third-party cryptocurrency exchange. As such, the Bitcoin IRA is better suited for money you don't want to use or touch until after retirement.