Cryptocurrencies are having a true bull run. As a result, more and more people are looking at ways to earn more money from them while at the same time avoiding heavy taxation. One way in which they achieve that is by placing the cryptocurrencies in a Roth bitcoin IRA.Technically, IRS notice 2014-21 made this possible, which means people have been able to hold a bitcoin IRA for some 4 years now. In reality however the situation is still quite complex and people don’t really understand the pros and cons of having a bitcoin IRA.
Pros and Cons of the Roth Bitcoin IRA
A report has recently been released that asked the IRS to provide better guidance on what they have to report and which liabilities they might be subjected to buy hold and cryptocurrencies in an IRA. Once this guidance has been released, it is likely that far more people will start to invest in this option. However, some very capable and more adventurous investors have already started doing so and they enjoy two different ways in which they can take advantage of the tax protection associated with an IRA.
First of all, you must find a custodian that can administer the individual retirement account. At present, cryptocurrencies are classed as unconventional Investments. This also includes precious metals and real estate. It is also possible to have an account with a Bitcoin Investment Trust (BIT) custodian, which is an organisation that holds bitcoin but provides its members with shares based on the value of the Bitcoin and these can then be included into the IRA.
The problem is that only accredited investors are able to invest in BIT shares. This means that they must have a 1 million dollar or more net worth and their annual income must be at least $200,000. This means that the vast majority of everyday individuals are excluded. Secondly, as this type of account holder you do not actually hold any cryptocurrencies. Rather, you own shares in the fund that does hold the Bitcoin and that you have to trust to act in your best interest. Doing so also incurs fees, which cover management costs and compliance costs.
If you still want to invest in Bitcoin but you do not meet the above requirements, the best way to do so is to start a self directed IRA. Technically, you will need to register as a limited liability company to do so. This means that you are able to hold your own Bitcoin without having to put it in the name of the custodian and without requiring approval from set custodian for any transaction. However, this place is you at risk of liability and you are responsible for all the paperwork. This does not in any way mean that you should not invest in a bitcoin IRA however. Rather, it means that you have to be realistic about what will be expected of you and you need to consider whether that is something you are happy to take on or not.
