At Royal Legal Solutions, we stay on top of all investment trends. One of the fasted growing trends today related to cryptocurrencies. Let’s take a look at this often confusing topic.
What is Cryptocurrency?
Cryptocurrency, in particular Bitcoin, was invented in 2009 created by Satoshi Nakamoto. In its most simplistic form, cryptocurrency is considered to be a digital currency that is used in virtual exchanges. While there are many types of cryptocurrencies available today, the most common to be used is Bitcoin. Bitcoin uses cryptography as a means of securing and verifying transactions. Cryptography is also used to control the creation of Bitcoins, and other digital currencies, through virtual databases that permit changes only when very specific conditions have been fulfilled.
Does the IRS Allow for Cryptocurrency Investments?
Current laws do not prohibit the use of cryptocurrencies. In fact, tax regulations from the Internal Revenue Service (IRS) do not dictate what you investments you can make with your retirement accounts, within the scope of allowable categories. (For example, your individual retirement account allows for investments into anything that could be considered stocks, bonds or mutual funds. Other types of retirement accounts allow for further options as well.) They do however prohibit two very specific types of investment activities:
- Life Insurance
Cryptocurrencies clearly do not fall into the life insurance category. With names like “Bitcoin”, there was some initial confusion regarding the collectibles classification. Because it is digital, and based on a 2014 notice from the IRS, rest assured that cryptocurrencies do not fall into the collectibles category either. Instead, the IRS identifies them as property, which is allowable under certain IRA plans.
Self-Directed IRAs and Cryptocurrencies
Cryptocurrency gains are well documented and come with potentially high-returns for your IRA. By turning a portion of your self-directed IRA (SDIRA) portfolio into a cryptocurrency investment is a modern way to further diversify your investments. (Please note, because cryptocurrency is still considered a fledgling investment, only a small percentage of your portfolio should be converted to help decrease risk and protect your net worth.) When it comes to taxation on your cryptocurrency investment, IRS property regulations apply. That means that investing in, through buys or sales, cryptocurrency will not prompt unrelated business income taxes or other similar taxes.
Find a Custodian
IRS regulations require the use of a custodian or trustee for a SDIRA. While you retain control of your SDIRA, the custodian can help you facilitate exchanges at your request and ensure you do not violate any tax codes while doing so. However, because of the complexities of such a new investment capital, not all firms will allow these kinds of investments. Finding a trusted and knowledgeable custodian will go a long way in simplifying your cryptocurrency conversion and investment process. The experienced professionals at Royal Legal Solutions can help. Not only have we worked with investors new to the cryptocurrency scene, but also we have extensive experience with SDIRA custodial services in general.
Cryptocurrency investments may not be for everyone. However, the experts at Royal Legal Solutions can help explain how they work as well as what options are available. Ultimately, the decision to invest is up to you as the account owner, but we are here to help you gain a better understanding of investment opportunities and the regulations you need to know before investing.