How To Invest In Cryptocurrency With A Self-Directed IRA

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Last Updated on: 10th February 2023, 10:19 pm

For many U.S. investors, a self-directed IRA is all you need to get started investing in a diverse range of cryptocurrencies on a tax-free basis. If you want to get in on the action and capitalize on the major momentum in the crypto market, opening a self-directed IRA (SDIRA) is your first step. 

What was once considered a fringe asset class only a few years ago is now taking the American public by storm—after all, 46 million Americans now own Bitcoin. Every year, more investors are getting on board with crypto and, nearly every year, the price of Bitcoin trends up. If you don’t act soon, you might miss out on the gains. 

Wondering where to start? In this article, we’ll go over everything you need to know to get started investing in cryptocurrency with a self-directed IRA. 

Self-Directed IRA 101: Benefits and Risks

There are myriad benefits associated with SDIRA investing, but there are also some drawbacks that investors should be aware of before getting started. Below, I’ve provided an overview of some of the top reasons for and against investing, either in cryptocurrencies or conventional asset classes, with an SDIRA.

Advantages of SDIRAs

Like an individual retirement account, SDIRAs offer unique tax benefits that can save investors a lot of money in taxes over the lifetime of their investment. Since 1974, these tax benefits have been the main selling point for IRAs. However, there are other key advantages to SDIRA investing, including:

  • Diversification: SDIRAs allow investors to go beyond stocks and bonds by diversifying with alternative assets like Bitcoin, precious metals, and even real estate. 
  • Tax Benefits: Like regular IRAs, SDIRAs allow investors’ assets to appreciate on a tax free or tax-deferred basis depending on if they have a Roth or Traditional IRA, respectively. 
  • Checkbook Control: SDIRAs provide investors with total freedom over the investments they purchase (i.e., “checkbook control”), with the authority to buy, sell, or liquidate their assets whenever they choose.
  • Higher Returns: Although SDIRAs do not guarantee a higher financial return, the ability to add cryptocurrencies, precious metals, annuities, and real estate to your investment portfolio can provide returns you otherwise wouldn’t be able to access.

Disadvantages of SDIRAs

Like all investment vehicles, there are certain disadvantages associated with SDIRA investing, including the following:

  • Rules and Restrictions: Self-directed IRA rules are imposed by the IRS and can carry penalties or trigger tax events if violated, whether intentionally or not.
  • Contribution Limits: As of 2021, the IRS limits SDIRA contributions to $7,000 per year, which is the maximum any account holder can put into their account within a 365-day period. 
  • Associated Fees: SDIRA providers sometimes charge higher fees than standard brokerage accounts since they take on additional reporting duties with the IRS.

Can You Invest in Bitcoin With An SDIRA?

Yes, self-directed IRAs are one of the most commonly used tools for investing in cryptocurrencies. In fact, several of today’s leading self-directed IRA companies were established with the sole purpose of assisting investors with cryptocurrency investing.

Like stocks and mutual funds, crypto-assets can be purchased and held within an IRA without penalty. However, due to their volatility and price instability, some employer-sponsored accounts might limit one’s ability to invest in cryptocurrencies. That’s why it’s essential that investors open a truly self-directed IRA account if they want complete exposure to the crypto market, and not merely a segment of it. 

How To Buy Cryptocurrency With An IRA

In order to buy cryptocurrencies like Bitcoin, Ethereum, or Ripple with an SDIRA, your first step is to apply for an account. The sign-up process, in most cases, is easy. Once your account is open and funded, the IRA company can assist with facilitating each transaction from start to finish. 

To make your job easier, we’ve put together a list of the world’s most reputable cryptocurrency IRA companies. There, you’ll find the contact information of various notable SDIRA providers who have years of industry experience, stellar customer reviews, affordable fees, and a wide variety of assets from which you can select. 

A self-directed IRA cryptocurrency account is fully insured by the FDIC, which means any assets lost due to cyber theft or criminality can be returned to you without charge. Therefore, you can invest in cryptocurrency via an IRA with complete peace of mind. 

How Much Does it Cost to Open a Self-Directed Crypto IRA?

We’re often asked how much it costs to open a self-directed crypto IRA or Bitcoin IRA. This is a good question, since most crypto IRA providers don’t list their prices on their websites. Below, we’ve listed the prices of some of the world’s most popular self-directed IRA providers that specialize in cryptocurrency investing.

  • BitcoinIRA: Platform fees between 1.5% and 12.50%; transaction fees up to 5%.
  • Noble Bitcoin: One-time account enrollment fee of $550; transaction fees vary. 
  • iTrustCapital: $29.95 monthly custodial fee, plus 1% transaction fee.

The prices listed above are on par with the vast majority of SDIRA firms, and even some standard brokerage IRA providers such as Charles Schwab, Fidelity, and Vanguard. Although these accounts come at a cost, these fees help ensure top-notch cybersecurity and asset protection in the event of a disaster.


Taxes and Self-Directed Bitcoin IRAs

Investors who purchase and store their Bitcoin or altcoin cryptocurrencies in a self-directed Roth IRA do not owe capital gains taxes on their investments because these accounts are funded with after-tax dollars. Therefore, crypto held within Roth SDIRAs are not subject to taxation. All crypto holdings outside of these accounts must be claimed on IRS Form 1040 on your annual tax return. 

Since the IRS classifies cryptocurrency as property, and Bitcoin not held within an IRA is subject to potentially hefty capital gains taxes. It is treated the same way as a stock in the eyes of the IRS. However, if Bitcoin (or any other cryptocurrency token) is never liquidated into cash, it will never trigger a tax event. 

Don’t Wait, Open a Crypto IRA Today

Start investing today! The longer you wait, the longer your portfolio is missing out on gains. To make the first move in your cryptocurrency investing journey, open a Bitcoin IRA account. Although all of our top-ranked self-directed IRA companies are excellent choices, we recommend contacting several providers and shopping around for the best deal possible.    

Mark T.
Mark T.

Mark has worked in the investment industry in Chicago and New York for over 15 years. After graduating from Chicago State University with a degree in Finance, he has occupied various management positions at reputable banks and financial institutions, including: Chase, Bank of America, Wachovia, Sterling Trust and Fidelity. His experience has led him to develop a keen understanding of the current economic landscape. For the past 10 years, Mark has been working as an independent investment advisor and has helped many Americans learn how to protect and grow their savings by properly diversifying their portfolios.

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