Cryptocurrency IRAs and Your Taxes

Ty GainesUpdated at: Jan 3rd, 2022

What is a crypto IRA?

Cryptocurrency IRAs are self-directed individual retirement accounts (IRA) that invest in cryptocurrencies as well as or instead of traditional assets.

What are the tax benefits of including crypto in an IRA?

IRAs receive preferential tax treatment from the IRS. If you don’t expect to sell a crypto asset until you reach retirement age, you may be able to avoid paying capital gains tax if you buy it with your IRA. 

Traditional IRA

Contributions of crypto to a traditional IRA are tax deductible, assuming you meet certain income thresholds set by the IRS. When you cash out your IRA, you will owe regular income taxes on the withdrawal of funds, provided you wait until you are retirement age. 

Roth IRA

In a crypto Roth IRA, you do not pay capital gains tax on any increase in the value of your crypto. However, you will not be able to deduct the deposit from your income for tax purposes. That said, there is a trade off. When you make a qualified distribution of a Roth IRA, you will not pay any taxes because you paid them at the time of deposit. 

SEP and SIMPLE IRAs

Two less common types of IRAs are SEP-IRAs and SIMPLE IRA. These are most frequently set up by small business owners to provide and contribute to their employees’ retirement accounts. Contributions to SEP-IRAs and SIMPLE IRAs receive deferred taxation and are taxed as income upon withdrawal, just like a traditional IRA. 

What are the risks of buying crypto with an IRA?

You cannot withdraw IRA funds without penalty until you reach retirement age, which is currently set by the IRS at 59 ½ years old. Although there are some exceptions, most early withdrawals from IRAs are subject to general income tax plus a 10% penalty.  

Additionally, if upon cashing out an IRA has decreased in value, that decrease cannot be reported as a capital loss or as an itemized deduction. Before 2018, if the combination of IRA losses and all other miscellaneous losses exceeded 2 percent of an individual's adjusted gross income, IRA losses could be reported as a miscellaneous itemized deduction. However, the Trump administration's Tax Cuts and Jobs Act of 2017 made all losses nondeductible until at least 2025.

How can I invest my IRA in crypto?

An IRA requires a custodian; an entity that ensures the IRS’s conditions for preferential tax treatment are upheld. When IRAs contain traditional assets, this custodian is usually a bank or other large financial institution. However, for those interested in buying crypto with their IRA, there are an increasing number of services that will take on this role. 

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