You can hold cryptocurrency in your individual retirement account to experience tax-deferred growth and benefits. Capital gains in a cryptocurrency IRA are not subject to annual taxation. The IRA, traditional or Roth, and the transactions you make may also offer added tax benefits. Here are the tax implications of a crypto IRA:
Tax-Free and Tax-Deferred Growth
Opening a cryptocurrency IRA gives you access to tax-free or tax-deferred growth, depending on the account option you choose. If you choose a traditional IRA, contributions are tax-deductible, and the investments grow without tax. Income tax is deferred until after retirement or when you start making withdrawals. In a Roth IRA, you make contributions with after-tax dollars, resulting in tax-free withdrawals when you retire. The capital gains from your crypto assets are also tax-free.
If you’re comfortable paying the taxes now, choose a Roth IRA and enjoy tax-free growth. Choose a traditional IRA to defer taxes on your monetary gains. Trading crypto using brokerage accounts subjects your capital gains to annual taxes. Crypto IRAs allow you to avoid annual taxation by eliminating or deferring it. Eliminating taxes with Roth IRAs may result in more gains because your withdrawals will be tax-free. Deferring taxes gives you access to more funds to trade and potentially grow your holdings and leverage lower future taxes.
Tax Rates and Holding Periods
Crypto IRA contributions and capital gains are meant to be accessible after retirement. If you withdraw money from a traditional IRA before retirement, the withdrawal is taxed at the ordinary income tax rate. Roth IRAs offer tax-free withdrawals if you sell the assets after retirement. Selling cryptocurrency held in a Roth IRA before retirement may result in capital gains taxes. Both gains and losses from selling cryptocurrency within an IRA are subject to tax at applicable capital gains rates.
Short-term gains from assets held for less than a year are taxed at the ordinary income tax rate. Long-term gains from assets held more than a year qualify for lower tax rates. Traditional IRAs have a required minimum distribution, which means you must start making withdrawals when you reach a certain age. Roth IRAs don’t have such requirements because the contributions are made with after-tax income, and withdrawals are tax-exempt.
Tax Reporting and Early Withdrawals
Keep comprehensive records of your crypto transactions to report your gains and losses accurately. The IRS expects you to accurately report crypto transactions made within the IRA, especially the distributions. You don’t have to report individual trades because only the contributions and distributions are used when calculating your tax implications. Removing money from a traditional IRA before the legal retirement age results in ordinary income tax and early withdrawal fees. If you have a Roth IRA, you can enjoy tax-free withdrawals of contributions at any time, but early cash-out of capital gains will result in taxes.
When you hire a financial expert, they can handle all tax reporting to the IRS and know how to navigate cryptocurrency issues like forks, airdrops, and staking. It is unclear whether the IRS treats staking rewards as income inside an IRA, but forks and airdrops may be labeled as taxable income. Seek guidance from your financial advisor to learn more about the tax implications and withdrawal guidelines of your cryptocurrency IRA.
Open a Cryptocurrency IRA Today
The value of major cryptocurrencies is providing opportunities for substantial capital gains. Crypto also offers a hedge against inflation, making it a worthwhile investment if you’re seeking security and portfolio diversification. Contact an IRS-approved financial advisor today to learn more about opening a free cryptocurrency IRA account.
