Twelve years ago, no one was thinking about Bitcoin in their IRA. At the time, it had little value. And of those who even knew it existed, few thought it would last—especially among the financial press, which had for years dismissed crypto.
In spite of its critics, though, Bitcoin—and crypto in general—has seen a flood of interest from ordinary investors, hedge funds, major corporations, and even countries.
Considering how quickly cryptocurrency has taken off, it’s worth considering 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
In 2021 alone, the value of popular cryptos like Bitcoin, Ethereum, and Solana has soared, meaning massive gains for investors. But it could also mean hefty tax bills for anyone wanting to cash in.
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 sold your holdings just shy of a year, they’d considered short-term capital gains. That means your profit of $32,466 would count as normal income on your taxes.
Not only would this mean an increase in taxable revenue. It could also push you into a higher income tax bracket. Continuing the previous example, assuming you make $55,000 a year, your crypto earnings would push you into the 24% tax bracket for 2021. That would also mean you owe roughly $7,791.84 of your crypto earnings back in taxes.
Had you instead bought and sold Ethereum within a crypto IRA, however, you would owe nothing on your current gains, regardless of whether they were short-term or long-term. Nor would you have 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. And 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, these same investors are looking to crypto as a portfolio diversifier due to its weak correlation with stocks and bonds. In fact, a survey by the Journal of Financial Planning and the Financial Planning Association recently found that a growing number of financial advisors are recommending crypto to offset losses in their portfolios.
And crypto (particularly Bitcoin) hasn’t just developed a reputation for behaving independently of traditional markets, either. It has historically outperformed them.
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% since just 2011. That amounts to average annualized returns of 230% over the past decade, compared 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 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 has seen greater growth than Bitcoin—a trend JPMorgan sees as continuing due to things like Ethereum’s myriad of use cases and faster transaction times.
It’s far from the only altcoin having a standout year. Solana, Cardano, and Polka Dot have all seen tremendous gains this year, as well. And crypto’s not just developed a reputation for beating the market.
4. Bitcoin Is Fast Becoming the New Hedge Against Inflation
Despite its reputation as a hedge against inflation, gold’s performance during inflationary periods has been anything but consistent.
That has a growing number of investors looking to Bitcoin—with its finite supply of about 21,000,000 built into its code—as the new inflation hedge. In fact, JPMorgan recently noted that institutional investors are switching from gold to Bitcoin, and it’s easy to see why.
As of October 14, 2021, Bitcoin was up a whopping 498.5% year over year, compared to gold, which was down 6.2% for the same period. Meanwhile, the year-over-year inflation rate as of the end of September was 5.4%.
And it’s not just Bitcoin. Other crypto assets have grown at a significantly higher rate than inflation over the course of 2021.
5. The Technology Behind Crypto Isn’t Going Anywhere
Since crypto’s inception, its critics have dismissed it as lacking intrinsic value, but what so many fail to realize is just 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.
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.
These examples help illustrate the fact that crypto is here to stay. No wonder banks and other organizations are racing to discover how crypto can benefit them.
An Easy, 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. Just remember that crypto is a new asset class with an uncertain trajectory, and Bitcoin’s past performance is no guarantee of future results. Before investing in such assets, 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, 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 (and none of the hassle of a traditional self-directed IRA).
Alto CryptoIRA offers:
- No monthly account fees or setup costs
- More than 135+ crypto coins and tokens for trading
- The ability to buy and sell crypto 24/7, in real time
- $10 investment minimums
- A low, 1% trading fee
- Integration with Coinbase
Ready to discover tax-advantaged crypto investing? Create a CryptoIRA account for free today.