With every new Bitcoin milestone, more and more crypto bears are coming to appreciate the staying power of the cryptocurrency. Furthermore, as blockchain challenges the world monetary system, investors are increasingly diversifying their retirement savings with a Bitcoin IRA.
Despite this, numerous misconceptions abound about Bitcoin IRAs (a.k.a. Digital IRAs or Crypto IRAs). Like almost all new innovations, cryptocurrencies are undoubtedly risky assets. But fear of the novel and unknown has led to widespread myths about crypto retirement accounts. In this article, we examine and debunk some of these common misconceptions.
Misconception #1: Crypto IRAs are illegal or just an IRS loophole.
The IRS has addressed cryptocurrency as an asset type directly as early as 2014, when it released Notice 2014-21, which categorized digital currencies as personal property. So, cryptocurrency in an IRA is neither illegal nor a legal loophole. The IRS does caution against the risk that can come with crypto investment, but the government entity does not include cryptocurrency or personal property among its list of prohibited asset types in a Self-Directed IRA.
Misconception #2: The IRS treats crypto assets as a currency.
Cryptocurrency has been famously difficult to define as an asset class. According to the IRS, though, virtual coins like Bitcoin do not count as currency. Rather, since 2014, the IRS has categorized virtual currencies as personal property for tax purposes because they are (a) definable, (b) identifiable by third parties, (c) capable of assumption by third parties, (d) have some degree of permanence and persistence, and (e) grant the person who holds the proprietary right legal protection from third parties.
Misconception #3: There is no real regulatory oversight of Digital IRAs.
Cryptocurrency has actually been increasingly monitored by regulators, and Digital IRAs are no exception. Some of the crypto exchanges that purchase virtual currency for Digital IRAs are closely regulated by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Some Digital IRA companies, like BitIRA, also take the extra step of registering as a money services business (MSB) with the Financial Crimes Enforcement Network (FinCEN), a branch of the U.S. Treasury Department.
Misconception #4: Only cryptocurrency funds (like GBTC) can be held in an IRA.
Bitcoin (BTC), Ethereum (ETH), and other top coins can be held directly in a Self-Directed IRA without an intermediary fund. There are distinct advantages to this. For instance, if a company issuing a leveraged fund goes bankrupt, then investors would lose their investment in the fund (as happened, for instance, with Lehman Brothers in 2008). This counterparty risk is avoided when buying cryptocurrency directly in an IRA.
Misconception #5: Buying cryptocurrencies for your IRA is technically difficult.
While there are many ways to hold cryptocurrency, purchasing it for an IRA requires no specialized technical knowledge on the investor’s part. The IRA custodian specializing in virtual currencies handles all of the transactions and storage of digital assets within the IRA on behalf of the customer. A financial services company like BitIRA helps the investor through all steps, including assisting them in opening and maintaining a crypto IRA.
Misconception #6: Cryptocurrencies are too expensive (e.g. 1 BTC costs thousands of USD).
Some cryptocurrencies, like Bitcoin (BTC), have risen in value from mere fractions of a penny to be worth hundreds or thousands of dollars per coin. This is a testament to the financial value of BTC compared to USD. But it’s important to note that investors can buy small fractions of 1 BTC and other cryptocurrencies. Some newer coins do cost less than $1 USD each, but you can also buy 1 cent’s worth of BTC if so desired.
Misconception #7: There are no benefits to holding crypto in an IRA over standard crypto trading.
Assets in an IRA are actually tax-deferred. So, for example, cryptocurrency held in a Roth IRA that appreciates in value significantly over the years would not incur any taxes on those gains. If that same crypto was held outside of an IRA as a typical investment, it would incur capital gains taxes every single year. So, for those investors that believe in the long-term value of cryptocurrency (“HODLers”), holding digital assets in an IRA offers significant advantages.
Misconception #8: It’s costly to switch out crypto in an IRA for other asset types.
It is not costly to swap crypto assets for other qualified assets within an IRA. For one, with BitIRA, there are no liquidity fees for selling your cryptocurrency within an IRA. Once sold and those funds are in cash, investors are eligible to buy other qualified assets for an IRA.
Misconception #9: Fee structures for Digital IRAs are much higher than for other Self-Directed IRAs.
Fees for the ongoing maintenance of virtual currency in an IRA are comparable to those of other types of assets within a Self-Directed IRA. Fee structures differ, though, with each crypto IRA company. For instance, BitIRA does not charge fees for selling cryptocurrency within an IRA, but that is not the case with all companies in the industry.
Misconception #10: A Bitcoin IRA account can only be set up as a Traditional IRA.
Cryptocurrencies can indeed be held within a Traditional IRA, where investments are taxed upon distribution. But digital assets can also be held in a Roth IRA (where investments are taxed upon contribution) and even a SEP IRA or a SIMPLE IRA (for sole proprietors or small businesses). Any of these types of accounts can become a Digital IRA.
Misconception #11: Cryptocurrency is at higher risk of being stolen via hacking or social engineering.
As with any digital investment, security depends in large part on the financial services company and its policies. BitIRA, for instance, places an extreme emphasis on security: virtual currencies are stored on personal hardware devices, accessible only through multi-signature wallets, completely offline in cold storage, and stored in Class III vaults protected by multi-redundant security systems and armed guards, 24/7, 365 days a year. If in the unlikely event a security breach occurs due to any hacks, fraud, theft or mistakes, investors’ crypto assets are also fully insured.
As cryptocurrency gains widespread acceptance, more and more investors are diversifying their IRA with cryptocurrency. It’s important to do your research and invest wisely, but also keep in mind that misconceptions still abound about Bitcoin IRAs. This is slowly changing, and efforts to educate the public about cryptocurrency will hopefully continue to take effect.
If you are interested in the long-term investment potential of cryptocurrencies, we invite you to read the free BitIRA Essential Guide to Digital IRAs.