Owning Bitcoin Inside a Self-Directed IRA

Posted on: March 11, 2019

What is a Bitcoin IRA?

While there are many references across the internet to Bitcoin IRAs, it’s important to state that there is no specific IRS-backed account that’s solely designed for cryptocurrencies. However, Individual Retirement Accounts (IRAs) are a potential vehicle to hold bitcoin and other alternative assets. The IRS released a statement back in 2014 announcing they would treat bitcoin the same way they view stocks and bonds for taxation purposes. Note, however, that this designation requires a custodian in order to comply with regulations.

Owning bitcoin in an IRA typically involves special planning because most IRA custodians only accept more traditional assets such as stocks, bonds, mutual funds, REITS, money market funds and certificates of deposits (CDs). This is where self-directed IRAs come into the picture. Self-directed IRAs (also commonly called SDIRAs) offering non-traditional investments have steadily increased in popularity in recent years. Self-directed IRAs are most often invested in alternative assets like real estate, precious metals, notes, tax lien certificates, and private placements.

More recently, self-directed IRAs have been used to hold cryptocurrencies. These self-directed IRAs allow you to buy and hold bitcoins, or buy shares of dedicated funds that hold these assets.

Owning Bitcoin in a Self-Directed IRA

Bitcoin was the first digital cryptocurrency created and remains one of the most widely recognized. But Bitcoin has its fair share of company and nearly a thousand other cryptocurrencies have graced the market since Bitcoin was first introduced in 2009. Based on market value, Ethereum, Ripple, Litecoin are some of largest alternative forms of cryptocurrency.

It’s not very likely that you will see cryptocurrencies available in your employer’s 401K plan anytime soon though. That’s mainly due to 401K retirement plan sponsors being liable for the type of investments they offer, and cryptocurrencies are currently too volatile. While some government agencies around the world are preparing for these digital assets they currently are not regulated. Cryptos are also not widely viewed as a separate asset class. Many financial professionals are more optimistic about the long-term prospects of blockchain technology, the underlying technology behind them, than they are cryptos themselves.

Simply having access to an investment does not necessarily mean holding it in an IRA is for everyone. In fact, stocks, bonds, and cash are the most common asset classes used to save for retirement. Here are some of the pros and cons of holding bitcoins and other digital cryptocurrency assets in a self-directed IRA.