Buying Bitcoin – Enjoying Tax-free Gains
If you’re interested in buying Bitcoin, read this article by IRA Financial Group to discover how you never have to pay taxes.
The IRS and Cryptocurrency
2018 is relatively calm for bitcoin and most cryptocurrencies. This is a far cry from 2017. Then, the price of bitcoin skyrocketed over 1300%. The enormous increase in the price of bitcoin is creating significant tax headaches for cryptocurrency investors.
Although many consider bitcoin to be “cryptocurrency”, that’s not the case from a federal income tax standpoint. Bitcoins and other cryptocurrency are not a “currency” at all. On March 25, 2014, the IRS issued a notice that set its position on the taxation of virtual currencies for the first time.
According to the IRS Notice:
“Virtual currency is treated as property for U.S. federal tax purposes…general tax principles that apply to property transactions apply to transactions using virtual currency.”
Buying Bitcoin with a Roth IRA
So, the notice states that the IRS treats the income or gains from the sale of cryptocurrency, like Bitcoin, as a capital asset. In other words, it’s subject to either short-term or long term capital gains tax rates.
And the IRS is imposing extensive record-keeping rules and significant taxes on the use of bitcoin and other cryptocurrency.
However, if bitcoin investors use a Roth IRA to make investments, there’s no tax on the gains. Imagine if bitcoin or Ripple investors in 2017 were able to shelter almost 1300% of gains using a Self-Directed Roth IRA.
Tax-Free Gains with a Self-Directed Roth IRA
With a Roth IRA, contributions are after-tax. However, the Roth IRA must be open at least 5 years. Additionally, you must be age 59 1/2 for Roth IRA distributions to be tax-free.
The most popular way to buy cryptocurrency is through a Self-Directed IRA or Roth IRA. Again, the primary advantage of using a Roth IRA is that gains are tax-free. Of course, if you choose to use a Self-Directed IRA and you’re thinking of buying Bitcoin, gains are tax-deferred until you make a distribution.
How to Buy Bitcoin with a Self-Directed IRA
Below is a step-by-step breakdown of how to use a Self-Directed IRA to buy cryptocurrency:
- Establish a Self-Directed IRA LLC with IRA Financial Trust & Northern Trust.
- Your IRA cash/assets rollover to IRA Financial Trust tax-free.
- As manager of the LLC, you open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement. This identifies you as manager of the LLC and the IRA as the sole member.
- At your direction, the bitcoin IRA custodian will invest the IRA assets to the LLC tax-free. However, this is in exchange for 100% interest in the LLC.
- The individual retirement account will own the LLC by the IRA. As a result, it will be treated as a disregarded entity for tax purposes. All income and gains will flow back to the IRA without tax.
- The LLC will open an account at any cryptocurrency exchange. As manager of the LLC, you have control over the cryptocurrency exchange account.
Buying Bitcoin the Right Way
The IRS tax treatment of cryptocurrency creates a favorable tax environment for retirement account investors. And a Self-Directed Roth IRA is the most tax efficient way you can purchase bitcoin.
Q For You:
Do you have interest in buying bitcoin with your retirement funds? Which vehicle will you choose: A Self-Directed IRA or Roth IRA?