It has been made clear by the IRS that for the purposes of federal income tax virtual currencies should be viewed as property. This means that like real estate and stock, digital coins may be bought with retirement funds or to be more specific crypto ira.
Trustees or custodians holding IRA accounts on behalf of investors and these trustees include trust companies, banks or other IRS-approved entities. With a self-directed IRA it is possible to have investments that are more diverse and broader compared to an IRA that is controlled by traditional custodians like banks. Thus custodians of self-directed IRAs can allow investors to put their retirement funds in various kinds of assets including private placement securities, promisory notes, real estate as well as virtual currencies.
So what should one do if they are considering using IRA funds to buy virtual currencies? Before taking the plunge the things to keep in mind include the following:
1. Ensure you have control of your own private key
In order to buy digital coins with IRA funds you can ether use the Wallet Control IRA LLC solution or the Bitcoin IRA Custodian /Broker Controlled method. Each of the two methods have their own disadvantages and advantages.
When buying digital currencies using the Bitcoin IRA broker method, the assets are kept in a digital wallet which in typical circumstances requires verification by multiple signatures. In this case however the IRA investor is not in control of the associated private key or the digital wallet. Exchanging or selling the digital currency in question will also require that the investor interacts with the broker since the transaction cannot be carried out online. Additionally each side gets charged the commissions.
On the other hand when buying digital coins with IRA funds the Wallet Control LLC method allows you to control the private key.
2. Ensure you know all about the fees and commissions involved
It is a requirement for IRA investors to buy their virtual currency of choice via brokers that are associated with the Bitcoin IRA facilitator in the case of the Bitcoin IRA Custodian/Broker approach. In this case the digital currencies are bought through the phone and the investor is restricted to the cryptos listed by the broker. Commissions ranging between 10% and 25% will be charged by the broker in order to buy and sell the IRA-owned virtual currencies.
With Wallet Control IRA LLC on the other hand, the IRA holder has the freedom to buy and sell digital coins on whichever exchange they choose. This gives IRA holders more control over costs since most digital coin exchanges charge transaction fees ranging between 0.15% and 2%.
3. Ensure you know the risks
Investors must be aware of the financial risks they are exposing themselves to by investing in digital coins. Since there is a likelihood of losing everything, crypto IRA investors must possess the financial ability to live with this risk should the worst happen. This is because virtual currencies by their nature are highly volatile as well as uncertain.
Dippli is an independent media outlet that covers the current events in the crypto space. Got breaking news or a story to share? Then feel free to contact us at firstname.lastname@example.org.