Bitcoin is constantly making headlines. We hear stories of the crypto savvy investor buying Bitcoin in its early years and becoming a millionaire. As Bitcoin becomes mainstream, more investors are asking, “Why not me?” In fact, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. A self-directed Bitcoin IRA can lead investors to high yields along with the tax benefits of non-digital investment. Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a self-directed IRA-owned Business Trust.
Bitcoin is a type of cryptocurrency released in 2009 by Satoshi Nakamoto. With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger. Bitcoin is one of thousands of different cryptocurrencies and is considered the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet. This is a USB like device equipped with a PIN code.
Bitcoin as an investment
Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to a high of $20,000 by the end of 2017. In December of 2017, prices doubled in a matter of weeks. As I write this, its current U.S. value is $8735.20. Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA.”
Bitcoin Meets the IRA
By default, any IRAs dealing with Bitcoin are self-directed, since traditional IRAs don’t permit alternative investments. This leads us to the obvious question of whether the IRS permits Bitcoin investments, even under the self-directed IRA’s more flexible structure. The answer to this question isn’t so cut and dry. The IRS doesn’t explicitly name Bitcoin as a permissible IRA investment. However, it also doesn’t list Bitcoin as a forbidden investment. Currently, the IRS only list life insurance and collectibles as non-permissible IRA investments.
How to Invest in Bitcoin Using a Self-Directed IRA
Do Your Research.
The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment. Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publically available financials you’d find with traditional stocks. However, you can educate yourself on how the IRS deals with Bitcoin investments. A good resource is Investopedia’s Bitcoin Investment Guide.
Choose the Right IRA Custodian.
Make sure the custodian is IRS approved and allows Bitcoin investments. This can be a challenge during cryptocurrency’s early stages. Even if you do find a capable custodian, you won’t enjoy checkbook control over your account. Your IRA is self-directed, but isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without custodian involvement. The processing time and fees can add up when choosing this route. This doesn’t mean you should give up on Bitcoin investing with a self-directed IRA. We eliminate the custodial overhead by allowing Bitcoin investors direct access to their IRA funds on our online platform.
Choose a Good Cryptocurrency Exchange.
Once your self-directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.
Choose a Good Cryptocurrency Wallet.
For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.
Keep Bitcoin Investment in Compliance.
The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.
Enjoy Tax Deferred Earnings.
With a self-directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.
Explore Other Cryptocurrency Investments.
Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization followed by Ethereum and Ripple. When expanding your self-directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.
Get Started Today
We’ve discussed the steps required to start investing in Bitcoin using a self-directed IRA. Like any other investment, investors should complete their due diligence, choose a right custodian and be aware of custodial fees. Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their self-directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a self-directed IRA.