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Bitcoin Investing with a Self-Directed IRA

bitcoin investing

Bitcoin investing has been a hot topic since it’s meteoric rise back in late 2017/early 2018. After an equally astounding drop, it rose back up to over $12,000 during the Summer of 2019. Since then, it’s come back down to earth and sits at around $7,200 in late November 2019. Check out the current price of Bitcoin here. In the following, we wanted to revisit how you can invest in Bitcoin (and other cryptos) with your Self-Directed IRA. Please note, however, we are not telling you to invest in Bitcoin. This article is for educational information about Bitcoin investing with IRA funds. Cryptocurrencies as a whole is a very risky investment. Be sure to consult with a financial advisor to determine the best investments for your situation.

Buying Bitcoin with Retirement Funds

Retirement accounts are allowed to invest in just about anything. In fact, the IRS simply tells you what you cannot invest in. These include life insurance, most collectibles and transactions involving disqualified persons (more on this later).

Investing in alternative assets with retirement funds is seen as both tax-advantageous and way to better diversify your assets. The former allows for tax-deferred growth of your gains, while the latter opens your holdings beyond the usual stocks, bonds and mutual funds.

When you work with the proper administrator or custodian, like IRA Financial, you have complete freedom. No longer are your hands tied to the investments you bank or other financial institution offers. With checkbook control, you never need to ask for permission to make an investment. If Bitcoin investing is what you wish to do, then by all means, invest away!

What is Bitcoin?

If you have perused our site or read through our past blogs, you know we have tons of info about Bitcoin. Essentially, it’s the first (and most popular) cryptocurrency around. Blockchain technology allows these digital currencies to remain secure and there is no government that backs the “coin.”

Because it is decentralized, it’s up to users to “police” the transactions of Bitcoin. That’s where the blockchain comes in. Anyone can access the ledger that shows every transaction made using a particular Bitcoin. Once the transaction has been verified, it also gets added to the blockchain. This allows for complete transparency, but there is an element of anonymity to Bitcoin.

While more and more merchants allow the use of Bitcoin to buy goods and services, it’s seen as more of an investment. Afterall, it’s still in its infancy as an asset. The widespread acceptance of cryptos may be around the corner, or never come at all.

Bitcoin Investing with Your Self-Directed IRA

A Self-Directed IRA allows one to invest in Bitcoin, among thousands of other alternative investments. You can use a traditional IRA (pre-tax funds) or a Roth IRA (tax-free withdrawals).

Basically, there are two types of a Self-Directed IRAs: Checkbook Control and Custodian Controlled.

Custodian Controlled Self-Directed IRA

Many financial institutions have jumped on the self-directed bandwagon. They now offer Self-Directed IRAs that allow for alternative investing. However, there is a caveat. Your investment must be approved by the custodian first. While I custodian controlled Self-Directed IRA is better than a regular IRA, it doesn’t give you complete freedom.

However, this type of structure is suitable for many investors. If you don’t make many investments annually, it may not be a big deal to wait for approval. However, Bitcoin investing is a lot different. The crypto markets never close, and any time waiting for approval may affect your bottom line.

Checkbook Control Self-Directed IRA

We’ve already mentioned that IRA Financial offers its clients checkbook control. The ability to link your bank account to your Self-Directed IRA puts all decision making in your hands. IRA Financial is referred to as a passive custodian. By definition, being passive means “accepting or allowing what happens or what others do, without active response or resistance.”

Essentially, an LLC is created, which the IRA owns. You, as the manager of the IRA, make all investment decisions. IRA Financial, and other passive custodians, will never tell you what you can and cannot invest in. They are simply there to set up the account, maintain it and ensure it remains in compliance with IRS rules.

When it comes to Bitcoin investing, the choice is easy. You must have total control of your funds or else you put your retirement in jeopardy when you cannot make timely decisions.

Prohibited Transaction Rules

Since we’re not talking about investing in life insurance or collectibles, the only way a Bitcoin transaction may be prohibited is with a disqualified person. A disqualified person includes (but not limited to) yourself, your ancestors and lineal descendants and any entity you own at least a 50% stake in.

In simple terms, any investments you make can only be for the benefit of the IRA itself. You, or any other disqualified person, cannot benefit personally by the Bitcoin investment. You already have the tax advantages afforded by the IRA. Therefore, the IRS prohibits you from receiving additional benefits.

The IRS Stance on Bitcoin Investing

From a Federal tax standpoint, Bitcoin is not treated like a currency. Traditional currency, or fiat, like dollars and euros are treated differently than digital currencies. The IRS issued Notice 2014-21, which states, “Virtual currency is treated as property for U.S. federal tax purposes,” and “General tax principles that apply to property transactions apply to transactions using virtual currency.”

Therefore, The IRS treats the gains from the sale of Bitcoin as a capital asset. It is then subject to either short-term or long-term capital gains tax rates. Since Bitcoin is considered property, the IRS imposes extensive recordkeeping rules and taxes on its use.

Conclusion on Bitcoin Investing

Bitcoin Investing is still very new and quite unstable. If you get in at the right time, you can make a ton of money. However, the opposite is also true. It’s a classic case of buy low/sell high. We here at IRA Financial are still behind the crypto craze, and more importantly, the technology behind it. In fact, we have recently partnered with Gemini Exchange to invest in Bitcoin right from our app!

Again, it’s imperative to work with a professional before venturing into Bitcoin investing. If you have any questions about Bitcoin or alternative asset investing, please reach out to us @ 800.472.0646!

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