Originally Published October 19, 2021
Twelve years ago, almost no one was thinking about Bitcoin in their IRA. At the time, it was worth less than $20. And of those who even knew it existed, few thought it would last—especially among the financial press, which had for years dismissed crypto. (For a blast from the past, check out Forbes’ 2011 obituary for Bitcoin, titled So, That’s the End of Bitcoin Then.)
Despite its critics, though, Bitcoin—and crypto in general—has seen a flood of interest from ordinary investors, hedge funds, major corporations, and even countries. Recently, the world’s largest asset manager, BlackRock, partnered with Coinbase to offer Bitcoin exposure to institutional investors after staunchly opposing digital currencies for years.
Considering the massive gains cryptocurrencies have seen over the past decade and a half (even when you take into account the current crypto winter), it’s worth looking at whether you should invest in crypto as part of your retirement portfolio. Here, we’re looking at the top reasons to buy crypto in your IRA, starting with the tax advantages.
1. An IRA Could Be the Most Tax-Efficient Way to Get Into Crypto
Last year, the value of popular cryptos like Bitcoin, Ethereum, and Solana soared to record highs, meaning massive gains for investors. But for those who cashed in, it also meant a hefty tax bill.
Because cryptocurrency is considered an asset, it’s subject to short- or long-term capital gains taxes, depending on how long you’ve held a coin or token.
To illustrate how crypto taxes work, let’s say you bought 10 Ethereum tokens on October 15, 2020, at a cost of $361.83 each. Had you then sold them on October 13, 2021, when the value of a single token was $3,608.43, a total of $32,466 would be subject to tax (the total value of your holdings minus your initial investment). And because you would have sold your holdings just shy of a year, they would have been considered short-term capital gains when you filed your taxes earlier this year. That means your profit of $32,466 would have counted as normal income on your taxes.
Not only would this have resulted in an increase in taxable revenue. It might have pushed you into a higher income tax bracket. Continuing the previous example, assuming you made $55,000 from your regular job in 2021, your crypto earnings would have pushed you into the 24% tax bracket for 2021. As a result, you would owe roughly $7,791.84 of your crypto earnings back in taxes.
Had you instead bought and sold that same Ethereum within a crypto IRA, however, you would have owed nothing on your current gains, regardless of whether they were short-term or long-term. Nor would you have needed to deal with the hassle of reporting the sale price and cost basis for every trade.
With a crypto IRA, as long as you wait until you’re eligible to take distributions, the only taxes you’ll pay are on distributions for traditional and SEP IRAs. Better yet, with a Roth crypto IRA, you’ll pay nothing in taxes.
2. Investing in Crypto Is a Great Way to Diversify Your Portfolio
Done properly, portfolio diversification reduces the risk that volatility with one asset class will negatively impact your portfolio as a whole. For many investors, portfolio diversification has traditionally meant a 60/40 allocation of stocks and bonds.
The most successful investors, however, have long known that true diversification requires a more varied mix of traditional and alternative assets.
Increasingly, investors are looking to crypto as a portfolio diversifier. According to a survey by the Journal of Financial Planning and the Financial Planning Association last year, a growing number of financial advisors are recommending crypto to offset losses in their portfolios.
3. Bitcoin Has Outperformed All Other Asset Classes Over the Past Decade
The rise of Bitcoin has been nothing short of meteoric, with cumulative gains of 20,000,000% between 2011 and 2021. That amounts to average annualized returns of 230% over the past decade. Compare that with the NASDAQ 100, which ranked as having the second-highest annual rate of returns for the decade, with an average annualized rate of return of just 20%.
Clearly, Bitcoin’s story is hard to ignore, but it’s far from the only crypto asset that’s seen exceptional returns. In fact, in 2021, Ethereum saw greater growth than Bitcoin—a trend JPMorgan sees as continuing due to Ethereum’s myriad of use cases and faster transaction times.
4. The Technology Behind Crypto Isn’t Going Anywhere
Since crypto’s inception, its critics have dismissed it as lacking intrinsic value, but what many failed to realize was how revolutionary the underlying technology behind crypto is.
Most well known is its use in the easy and affordable transfer of funds without intermediaries. However, more than just a store of value, the technology underlying crypto could be the basis for a new digital world.
Blockchain and distributed ledger technology introduced an entirely new way to settle transactions and maintain records, one that cannot be altered later. Smart contracts build on this technology, allowing decentralized applications to exchange information, money, and execute other functions upon certain conditions being met. Non-fungible tokens (NFTs) are changing the way asset ownership is validated. Meanwhile, the metaverse is challenging our assumptions about how we’ll interact with each other in the future as everyone from artists like Snoop Dogg to businesses like Bank of America and Gucci rush to stake their claim in the world of Web3.
And the real-world applications of these innovations are countless. From managing digital rights and preventing counterfeiting to improving supply chains and decentralizing finance, crypto and the various technologies behind these assets are changing the world.
A Simple, Affordable Way to Diversify Your Portfolio
Depending on the crypto IRA you choose, adding cryptocurrency to your portfolio could be an affordable way to diversify your portfolio and invest in the future. Just remember that crypto is still a relatively new asset class with an uncertain trajectory, and Bitcoin’s past performance is no guarantee of future results. Before investing, do your homework and speak with an advisor.
Keep in mind that not all cryptocurrencies are alike. Additionally, as important as which cryptos you invest in (always do your research as any investment is a risk) is which crypto IRA you choose.
As you evaluate your options, consider monthly account custody fees, investment minimums, and other fees. With some cryptocurrency IRAs charging as much as $30 a month just to maintain an account and requiring $1,000 minimum investments, the amount you pay in fees could negate any tax benefits afforded by an IRA.
Add Crypto to Your Portfolio with Alto CryptoIRA®
When we created Alto CryptoIRA, we set out to make it easy and affordable for anyone to add crypto to their portfolio with all the tax advantages of an IRA. Alto CryptoIRA offers:
- No monthly account fees or setup costs
- 200+ crypto coins and tokens for trading
- The ability to buy and sell crypto 24/7
- Market and limit orders
- $10 investment minimums
- 1% trade fees
- Integration with Coinbase
Ready to discover tax-advantaged crypto investing? Create a CryptoIRA account for free today.