Many investors who use a Bitcoin IRA to invest in cryptocurrency realize that it’s more than the future of money. For crypto IRA investors, cryptocurrency is a potentially profitable investment asset, although highly risky.
Bitcoin is quickly becoming the public’s most well-known form of cryptocurrency. It’s also among the oldest, having emerged in 2009. Although it did drop to as low as $3,000+ in 2018, Bitcoin is making a comeback. At the time of editing this article (1/1/2022), Bitcoin has passed $40,000, which is the highest this virtual currency has risen. Now that Bitcoin (and other cryptocurrency) is back in the news and social media is flooding with “Bitcoin is Back” hashtags, retirement investors are re-gaining interest.
Crypto IRA Investment Process
The process for purchasing cryptocurrency is still unclear to most, because it’s not a stock or traditional investment. For most people in the U.S., Coinbase is the easiest option to buy cryptocurrency. This includes the ever popular Bitcoin, as well as Ethereum and Litecoin. If you wish to be a crypto IRA investor, the Coinbase process is fairly straightforward. You can verify the account and add a number of payment methods. This includes credit or debit cards, U.S. bank accounts and also wire funds. It’s important to note that cryptocurrency transactions are not anonymous. The identity of the currency owner is traceable back to a real-world identity. You can buy and sell Bitcoin on an exchange, much like a physical currency exchange.
This is very much like a physical currency exchange. You convert wealth from crypto to U.S. dollars and other national currencies, back to dollars or the crypto you select. Essentially, this is how you make money.
Tax-Treatment of Buying Cryptocurrency with Non-Retirement Funds
Although Bitcoin is a “cryptocurrency” from a federal income tax standpoint, Bitcoins and other cryptocurrency are not seen as “currency.” This came to be on March 24, 2014, when the IRS came out with Notice 2014-21. This was the first time the IRS set a position on the taxation of virtual currencies, such as Bitcoins. According to that notice:
“Virtual currency is treated as property for U.S. federal tax purposes.”
It further goes on to say:
“General tax principles that apply to property transactions apply to transactions using virtual currency.”
In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, as a capital asset. This makes it subject to either short-term (ordinary income tax rates) or long term capital gain tax rates. This is if the asset is in possession more than 12 months (15% or 20% tax rates based on income).
By treating Bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-keeping rules and significant taxes on its use.
Advantages of Using a Crypto IRA to Invest in Cryptocurrency
The IRS tax treatment of virtual currency creates a favorable tax environment for retirement account investors. Usually, when a retirement account generates income/gains from the purchase and sale of a capital asset, the retirement account doesn’t pay any tax on the transaction. The tax is deferred to the future when the retirement account holder takes a distribution. This applies if the gain was short-term or long-term.
Therefore, using retirement funds from a Bitcoin IRA to invest in cryptocurrencies can allow investors to defer any tax due from investment. In the case of a Roth IRA, you can completely eliminate tax.
How to Use a Self-Directed IRA LLC to Invest in Cryptocurrency?
When you work with IRA Financial Group to purchase cryptocurrencies, our team will make the process quick and easy.
Our team will help you establish a Self-Directed IRA account with IRA Financial Group.
All of your retirement funds or cash rollover to a new Self-Directed IRA account – tax free.
IRA Assets Move to LLC
Your IRA assets will transfer to the LLC tax-free in exchange for 100% in exchange for 100% interest in the new IRA LLC.
Open LLC Bank Account
You, as manager of the LLC, will open a bank account for the LLC at any local bank. IRA Financial Group will draft an LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
Get Checkbook Control
As manager of the LLC, you then have checkbook control over all the assets/funds in the IRA LLC to make the cryptocurrency investment.
Gain Tax Advantages
Since the IRA owns the LCC completely, it will be treated as a disregarded entity. This is for tax purposes. There’s no requirement for Federal income tax, and all income/gains from the investment flow back to the IRA.
Cryptocurrency investments, such as Bitcoin, are risky and highly volatile. Any investor who has interest in learning more about Bitcoins must do their research and proceed with caution.
At IRA Financial Group, our team will help you with the entire set-up of your Self-Directed IRA LLC “Checkbook Control” structure. We can handle it by phone, email, fax or mail. The entire process typically takes between 7-14 days to complete. The time-frame is largely dependent on the state of formation and the custodian who has possession of your retirement funds.
Our IRA experts and tax professionals are on site and can reduce the set-up time and cost. More importantly, each of our clients receive a tax professional to help establish their Self-Directed IRA LLC “Checkbook Control” structure.
Learn More: Buying Stock in a Self-Directed IRA
Get in touch
Do you have additional questions regarding the Bitcoin IRA process that were not covered in this article? Please contact IRA Financial Group at 800-472-0646. Or fill out our form and speak with an IRA specialist.