Crypto IRAs

Perhaps the most well-known cryptocurrency is Bitcoin. It was the first to be established and is also the one for which blockchain technology — essentially a decentralized, encrypted digital ledger — was invented. Since being made available to the public in 2009, it has seen a meteoric rise in value. According to NASDAQ, one Bitcoin was valued at $4,000 in March 2019 and had risen to nearly $40,000 in March 2022, equaling a 900% increase in five years.

Though Bitcoin continues to rise in value, the virtual currency has also experienced wild fluctuations. The valuation has been so volatile that only four months after El Salvador became the first country to recognize it as legal tender, the International Monetary Fund urged the Latin American nation to reverse its decision.

That’s not stopping some investors, however, from converting their entire retirement portfolios to self-directed and crypto IRAs. The move is risky, yet many Bitcoin buyers see it as a new way to diversify their portfolios, hoping it’ll become stronger than the price of gold and the dollar by the time they reach retirement. But is it the right decision for you?

The IRS defines virtual currencies as “a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (‘real currency’), that functions as a unit of account, a store of value and a medium of exchange.”

A variety of cryptocurrencies exist on the market today, including Ethereum, Litecoin, Cardano and, of course, Bitcoin.

For federal tax purposes, cryptocurrencies are treated as property. But, in terms of retirement investments, they are given the same tax breaks as traditional investments. That means any potential growth can count toward tax-free or tax-deferred savings, depending on the type of IRA you hold.

Bitcoin IRAs work similarly to regular IRAs, except you’re investing in what the IRS specifically calls convertible virtual currencies instead of mutual fund shares.

There are essentially two types of IRAs that can apply: self-directed IRAs (SDIRAs) or crypto-specific IRAs. The difference is who holds the “key” — you, in the former, or a third-party known as a custodian, in the latter.

A self-directed IRA is a type of IRA that allows holders to invest in a variety of alternative asset classes that are not available for regular IRA (traditional IRA, Roth IRA) holders. Cryptocurrency, like Bitcoin, is one such asset class available ‌to diversify your retirement portfolio.

As with any SDIRA, this is an option best suited for someone who wants to put in the effort to set it up and make it successful. Remember that custodians don’t give you any financial advice or conduct extensive due diligence on your behalf. Since it’s self-directed, you take responsibility for your own choices.

Crypto IRAs, on the other hand, allow investors to choose from a growing list of providers who act as fund custodians of your crypto wallet.

Below is a sampling of some of the most popular cryptocurrency and self-directed IRA provider companies on the market today.