Interested In A Crypto IRA? Here Are Some Basics
As retail and institutional investors have adopted cryptocurrencies as a legitimate aAs retail and institutional investors have adopted cryptocurrencies as a legitimate asset class to invest in — and the IRS has mandated the taxation of crypto — a new opportunity for tax-advantaged retirement accounts has emerged: the Crypto IRA. Through the capabilities of a Self-Directed IRA, it is now possible to hold cryptocurrency inside of a retirement account.
It's a revolutionary new frontier. Here are some of the basics of a Crypto IRA.
What Is Bitcoin?
Bitcoin is a decentralized digital currency launched in January 2009. It boomed onto the scene after the 2008 publishing of the Bitcoin whitepaper, A Peer-To-Peer Electronic Cash System, by an anonymous person or group named Satoshi Nakamoto. And since then, the cryptocurrency revolution has dramatically evolved.
In recent years, investors have begun considering Bitcoin (BTC) for IRAs, thanks to the expanding reach of cryptocurrency across the globe. BTC is operated by a decentralized authority, and the coins are created, traded, and stored in a public distributed ledger called a blockchain. Bitcoin is currently the most popular cryptocurrency with the largest market capitalization.
Bitcoin uses peer-to-peer technology for the facilitation of quick payments. People and organizations that participate in the Bitcoin network are called "miners," and they're responsible for the release of new bitcoins. There are only 21 million bitcoins that can ever be mined. As of this moment, 17 million bitcoins are already in circulation, which means almost 80 percent of the 21 million have already been mined.
The foundation of Bitcoin and many other cryptocurrencies is the "blockchain." Here's what that means: The blockchain is a series of interconnected databases housed in what's called a "block." As a block is filled up and completed, it is added to the existing blocks – creating a "chain" of blocks. The power of this decentralized infrastructure is that it creates an authoritative record of transactions without the need of a central authority to authenticate the agreement, such as a government treasury.
Accountability, transparency, and authenticity are intrinsically baked into the Bitcoin Blockchain – eliminating the need for an institution or third party to mediate a transaction. This technology is not only disrupting current financial models, but is providing financial services to those who lacked access prior.
What Is An IRA?
An Individual Retirement Account (IRA) is a type of financial account that allows for individuals to save for retirement in a tax-advantaged way.
There are three main types of IRAs: the Traditional IRA, Roth IRA, and Self-Directed IRA. Here's what those mean:
Traditional IRA
Traditional IRAs allow taxpayers to direct pre-tax dollars to a retirement account where investments grow tax-deferred until the withdrawal. At the time of retirement, the withdrawals are taxed at the individual's income tax rate.
Roth IRA
Named after its sponsor, former Delaware Sen. William Roth, a Roth IRA is a retirement account that allows account holders to make withdrawals tax-free and penalty-free, given certain conditions are met. Like the withdrawals, the growth in the account is also tax-free.
Self-Directed IRA
Self-directed IRA (SDIRA) allows individuals to hold various kinds of investments that are generally prohibited in other IRAs, including real estate. The firms providing SDIRA custody services don't offer financial or investment advice, so the key decisions are to be made by the owner.
Understanding Bitcoin IRAs vs Crypto IRAs
The term "Bitcoin IRA" can be slightly misleading. When holding crypto in a retirement account became accessible, the term "Bitcoin IRA" took hold as a colloquial name, helping to define this new type of investing. However, the term is only accurate if the account holds only Bitcoin. Likewise, the term Ethereum IRA could be applicable to a retirement account that solely holds Ethereum. However, the most accurate term to use is a "Crypto IRA," since Bitcoin and Ethereum are simply two out of thousands of cryptocurrencies.
At its core, a Crypto IRA is essentially a Self-Directed IRA that can hold cryptocurrencies. Since Self-Directed IRAs require the help of a custodian or a financial institution to hold the assets, software platforms like iTrustCapital facilitate these relationships for the investors, which saves investors from the costs associated with Self-Directed IRAs that hold cryptocurrencies. It's important to note that with Self-Directed IRAs, the responsibility of research and management of finances solely rests with the account holders (i.e., you) and not the service provider.
How Does A Crypto IRA Work?
A Crypto IRA functions much like a normal IRA. The self-directed investments made using cryptocurrency are treated and taxed as any other form of property within a retirement account. Cryptocurrency is a relatively new asset class for retirement accounts, with thousands of different cryptocurrencies available on the market.
What Are The Elements Of A Crypto IRA?
A Bitcoin IRA is pretty much like any other IRA, except you invest your money in A Crypto IRA is pretty much like any other IRA, except you invest your money in cryptocurrencies instead of traditional assets like stocks, bonds, mutual funds, etc. The process of investment, taxation, and withdrawal is similar to the case of traditional and Roth IRAs. However, there are some new elements that are only specific to Crypto IRAs.
A Crypto Exchange
Similar in function to a stock market, cryptocurrency exchanges manage all your trades relating to cryptocurrencies. This is a place where you purchase cryptos like Bitcoin, Litecoin, and Ethereum, etc. All your transactions regarding crypto take place in a crypto exchange.
A Custodian
A custodian holds your IRA account, and complies with the regulations of retirement accounts set by the IRS and other government agencies.
Crypto Storage
The security of your digital assets is very important. Many leading Crypto IRA providers offer cold storage for your cryptocurrency, meaning it's stored offline, making hacking or tampering more difficult.
Fees and Pricing
Many Crypto IRAs tend to have relatively higher fee structures than other forms of IRAs might. Some main costs Crypto IRA providers charge are set-up fees, transaction fees, and management fees.
How To Add Crypto To An IRA
The process of including Bitcoin or any other crypto to your IRA involves a few easy steps. First, you will need to open an IRA with a service provider that offers cryptocurrencies. Second, in most cases, you can fund the account through a transfer, rollover, or cash contribution. The final step is to place an order for Bitcoin or any other cryptocurrency you would like to hold in your account. Since the account would be categorized as a Self-Directed IRA, all financial and investment decisions are made by the individual.
Where Can I Set Up a Crypto IRA?
There are many financial institutions and organizations that help individuals set up Crypto IRAs. When choosing your IRA provider, you should pay special attention to the fee structure, range of cryptos offered, and ease of operations.
iTrustCapital allows clients to create Cryptocurrency IRAs (AKA Bitcoin IRAs) with no monthly fees, no set up fees, and low transaction fees. iTrustCapital is an award winning software platform that clients have transacted over $3.5B through, with over two dozen types of cryptocurrencies available for clients to self-trade, 24/7. iTrustCapital works with custodians and industry leading cold storage providers, like Coinbase Custody, which store iTrustCapital's clients' assets in secure cold storage.
DISCLAIMER
This article is sponsored by iTrust Capital, Inc. It is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any trading strategy.
iTrust Capital, Inc. is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrust Capital, Inc. is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation ("FDIC") insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrust Capital, Inc. makes no guarantee or representation regarding investors' ability to profit from any transaction or the tax implications of any transaction. iTrust Capital, Inc. does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.
iTrust Capital, Inc. makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrust Capital, Inc. disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.
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