Last Updated on January 30, 2020
IRA Financial’s Adam Bergman discusses why using a Self-Directed IRA is the best way to buy Bitcoin and other cryptocurrencies
If you’re interested in investing, a Self-Directed IRA is the best way to buy Bitcoin and other cryptocurrencies. In his latest podcast, Mr. Bergman discusses why you should use retirement funds for any Bitcoin investment.
How is Bitcoin Taxed?
Notice 2014-21 affirmed that Bitcoin and other cryptos are classified as property. Therefore, every time you have a transaction using Bitcoin, you realize a loss or gain. This occurs whenever you use them to purchase good or a service and every time you exchange one crypto for another. Thus, basis must be paid close attention to. Basis is the price you paid for something. In this case, Bitcoin. Whenever you transact with your Bitcoin, you must know the current price, compared to what you purchased your Bitcoin for. You’ll either have a loss or a gain on each transaction which must be reported. Obviously, if you use your Bitcoin for many transactions, it will create an accounting mess.
Currently, there is no de minimis exception. Although this may change with new legislation. The thought is, that there should be a minimum exception when defining basis. If the minimum is not exceeded, you would not need to worry about the loss or gain of your Bitcoin. For example, if the exception was at $1,000, any transaction under this amount would be clear of reporting. Any transaction over that amount would have to be reported, since it will have realized a gain or a loss. Since that’s not the case at the present time, it makes it near impossible to maintain a perfect record.
What is the Best Way to Buy Bitcoin?
Because transactions must be paid close attention to, using retirement funds are the best way to invest in Bitcoin. Why? Because retirement plans are tax exempt. You can invest, buy, sell, trade Bitcoin within an IRA or 401(k) and not have to worry about taxes. Traditional plans are tax-deferred, meaning you don’t pay taxed until you take a distribution. Roth plans are tax-free, meaning you pay taxes before you contribute, and never pay taxes again.
A Self-Directed IRA is generally the best way to buy Bitcoin. Anyone can open a Self-Directed IRA. You can roll over other retirement funds to the plan, but you must have earned income to directly contribute to one. A Solo 401(k) is a popular option if you have any self-employed income. It has similar tax advantages as an IRA.
IRA Financial will help you set up a Self-Directed IRA for Bitcoin investments, also called a Bitcoin IRA. You can set up an account with a crypto exchange and link your IRA LLC to it. This way, you can buy/sell/trade Bitcoin at any time.
Simply put, the Self-Directed IRA is the best way to buy Bitcoin, and it’s not even a debate! Keep in mind, Bitcoin bought with IRA funds is a passive investment. This means you are looking to make a profit from the investment, not use the currency to purchase products or services. One last thing to note: we are not advising you to invest in Bitcoin. We’re just telling you the best way to do so, if you choose that route.