By using a Roth IRA, an investor can purchase and sell crypto tax-free.
Personal Crypto Accounts vs. Roth IRAs as Crypto Retirement Accounts
The difference in taxation between personal crypto gains and crypto Roth IRA gains is significant. Say you bought $10,000 USD worth of on January 1, 2017 and sold that BTC on August 26th, 2021 for $470,988. How much of that profit do you get to keep on your $460,988 gain? If you bought and sold the bitcoin personally, you’d only get to keep $345,741 of the gain, as you would be paying taxes of $115,247. If you bought and sold BTC in a Roth Bitcoin IRA, you’d get to keep the entire $460,988 gain.
A $115,247 tax assumes a federal long term capital gains rate of 20% and a state tax rate of 5% for a total tax rate of 25%. There are no taxes owed when you sell crypto in an IRA and the gains are designed to come out entirely tax-free at retirement with a Roth IRA.
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Retirement Accounts Are For Building Long-Term Wealth
Roth IRA funds generally come out tax-free once the account owner reaches retirement age of 59 ½. An investor can access the funds before 59 ½ but would be subject to taxes on the gains and will have a 10% early withdrawal penalty to access their Roth IRA gains. As a result, investors using any type of IRA or other retirement account should be looking towards building wealth for the long term.
Bitcoin IRAs & Crypto IRAs: How Do They Work?
IRAs can own bitcoin and other cryptocurrencies, as IRAs can own any property for investment purposes, whether that is publicly traded stock, private company stock, or real estate. The only assets restricted to IRAs are collectibles, life insurance, and s-corporation stock.
An IRA can contain a so long as the NFT isn’t a or . For example, an IRA cannot include CryptoPunk NFTs or Beeple’s “Everydays – the First 5000 Days.” An IRA can, however, contain NFTs that are based on some utility value such as access, rights, or opportunities so long as those NFTs are held for investment purposes and not for personal use by the IRA owner. For example, a crypto IRA could buy an NFT that is a ticket to an event or that provides special access. This right to access that the NFT holds isn’t collectible in nature and can be owned by an IRA.
It’s important to note, however, that you can’t with all IRAs. Broker-dealers and financial advisor-controlled IRAs are generally restricted to publicly traded stocks and funds and they do not allow their customers to own crypto and other “alternative assets” in their IRA. If your IRA is with a company that doesn’t support crypto, you can always transfer funds from an existing IRA to a new company that allows you to buy crypto with your IRA. Here are the three steps you need to complete to buy crypto with an IRA.
Step 1. Establish an IRA with a company that allows you to buy crypto with their accounts.
When looking at IRA companies that offer crypto IRA accounts, you should first know if they are licensed and regulated. A company that offers and holds IRA accounts must be a bank, trust company, or credit union. They could also be a broker dealer specifically approved by the IRS, but those are less common in the alternative asset space. There are many providers of IRAs that are third-party administrators who use someone else’s trust license to offer IRAs. These companies are not examined by a banking regulator and investors should proceed with caution when using them as their IRA custodian.
An IRA investor should carefully examine the fee structure of the IRA company. Some companies charge you a percent when you trade and a percent of assets annually, while some just charge a trading fee, and others charge a combination of an annual account fee and a trade fee. For example, Directed IRA charges a $295 annual fee for the IRA and a 1/2% trade fee.
Crypto investors should also look at what cryptocurrencies are available with their crypto IRA provider. Some only offer bitcoin and while others offer and other .
Step 2. Transfer, Roll-Over, or Contribute to the IRA
Funding a crypto IRA is different from funding a personal crypto account. When funding a crypto IRA, you don’t link your personal bank account to fund it with . Instead, the IRA company needs to receive your IRA contribution, transfer, or rollover. Once received, the IRA company will then allow your funds to be used for crypto trading. Directed IRA sends your funds to a crypto trading account owned by your IRA that is on the Gemini Exchange, where you have full authority to trade using Gemini’s mobile or Active Trader interface (Gemini’s trading fees apply). Many crypto investors will transfer over existing Roth IRA or Traditional IRA dollars from a broker dealer account over to their crypto IRA. There is no tax consequence to transfer over existing IRA funds to a crypto IRA. You can also fund a crypto IRA with an old employer 401(k) account by executing a direct rollover of the funds to the crypto IRA. For those who don’t have existing retirement account dollars, you can contribute new funds, subject to retirement account contribution limit rules, of up to $7,000 a year to your crypto IRA (Roth or traditional). If you are 50 or older, you can contribute $8,000 a year. It’s important to note that you cannot move existing crypto that you personally own into a Roth IRA.
Step 3. Buy Crypto with the IRA
Once the crypto IRA trading account has been funded with U.S. dollars, the crypto IRA owner is able to trade crypto with their crypto trading account.
Example:
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