Last Updated on May 17, 2021
If you haven’t heard, the IRS has changed up the Form 1040, which most people use to file their tax return each year. The change is small and only affects those who have owned cryptocurrencies during the tax year. The change, which is making it harder to hide Bitcoin, is hard to miss now. It appears in the first section of the form. The question, which first appeared last year, states “At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?” You must check yes or no. Therefore, if you possessed any type of crypto during the year, you must tell the IRS. No excuses!
- You can no longer hide your Bitcoin investment from the IRS
- You must answer the 1040 question truthfully
- For investment purposes, the best way to hold Bitcoin is with a Self-Directed IRA
What You Need to Know
If you are a crypto investor, you can no longer fail to mention that to the IRS. Last year, the question was placed on a part of the return many filers did not utilize. It was easy to claim ignorance. Now, you don’t have that option based on it’s new placement. Obviously, you must answer truthfully, or the IRS will know. This comes as bad news for thousands of Bitcoin investors. Bitcoin, the world’s premiere digital currency, has seen meteoric rises and falls over the last several years. If you hopped on the digital currency train, it’s time to pay the conductor.
Cryptos are treated as property, as opposed to currency, like the dollar or euro. Therefore, every Bitcoin, Ethereum and LiteCoin transaction sees a capital gain or loss, that must be reported. It doesn’t matter if you used your digital currency to buy a cup a coffee or traded $100,000 in one crypto for another, it must be filed with the IRS.
Those adhering to the rules have expressed their disdain. Avid crypto users have hundreds of transactions annually, which could take hours to go over. There is talk about having a minimum amount ($200) before having to report a transaction. However, no one knows if and when that may go into effect. As it stands, every transaction must be accounted for.
Bitcoin as an Investment
There’s no concrete data to support this, but in my opinion, I’d guess 90%+ of people who own cryptos use it as an investment, not for purchasing goods or services. Therefore, to avoid all the needless paperwork in dealing with capital gains and losses, it’s best to invest in Bitcoin and other cryptos with an IRA, specifically, a Self-Directed IRA.
Though it’s now harder to hide Bitcoin investments when investing outside of a retirement plan, there’s no need to worry about it when investing with a retirement account. Since cryptos are categorized as property, it’s akin to investing in stocks or real estate. You can buy, sell, hold and trade all the cryptocurrencies you want and not have to worry about the tax implications annually.
As you probably know, IRAs are tax-advantaged accounts, in that the taxes are deferred until you withdraw from the plan. In the case of a Roth IRA, contributions are made with after-tax money and all qualified distributions are tax free. It’s up to you, the investor, to decide which plan to use. Either way, your crypto investments are not taxed every year. Obviously, you should keep track of your investments, and what you do with each of them.
Crypto IRAs are Easy to Set up and Maintain
IRA Financial has partnered with Gemini Exchange to make setting up a Self-Directed IRA for Bitcoin investing as easy as opening an account at a bank. In fact, it’s even easier with the IRA Financial app! You simply open up an IRA at our sister company, IRA Financial Trust. You then fund the account and then open an IRA account at Gemini for crypto investing. The Gemini account is opened in the name of your Self-Directed IRA, which is then funded by your new Self-Directed IRA. Once the funds are with Gemini, you can then invest to your heart’s content, without the need of an LLC or a broker. Gemini is one of the leaders in crypto exchanges.
Your funds are safe and secure, plus fees are kept to a minimum. Plus, if your only interaction with cryptos are with your IRA, you do not have to check yes for the 1040 question. You avoid any IRS scrutiny because of this. This is because the IRA owns the Bitcoin or other crypto. You do not personally own it until you withdraw it from the plan.
Therefore, the optimal way to invest in cryptos is to use an IRA (or Solo 401(k) plan if you are self-employed). You don’t have to worry about tax implications while it remains in the account and you don’t have reporting requirements on the new 1040 form.
Because it’s now harder to hide Bitcoin and other cryptocurrencies that you own personally, a Self-Directed IRA should be strongly considered. Of course, the IRS has rules in place for what you can and cannot use retirement funds for. It’s important to work with a professional to ensure you follow all the rules and regulations, especially the prohibited transaction rules.
Also, in a recent interview on CNBC, posted on 11/30/20, the Winklevoss twins expect Bitcoin to be the decade’s best performing asset, with 25x gain possible. Of course, that’s pure speculation, as no one really knows what will happen with this asset.
If you have any questions about how to invest in cryptos with an IRA, please give us a call at 800.472.0646 today!