Bitcoin is IRS-Compliant for Retirement Accounts

The IRS has ruled that digital currency has “an equivalent value in real currency.” It therefore can be used to purchase goods or services. Furthermore, the IRS Virtual Currency Guidance: Notice 2014-21 actually names bitcoin as one example of virtual currency, and declares “Bitcoin can be digitally traded between users and can be purchased for, or exchanged into U.S. dollars, Euros, and other real or virtual currencies.”

The IRS notice is clear and straight forward. Since bitcoin can be exchanged for dollars or other currencies, it can be used in place of dollars or other currencies to make investments and to fund your IRA or 401K. You should be aware though that the same IRS notice also states that, for Federal Tax purposes, bitcoin will be regarded as “property.” Since bitcoin is considered property, a custodian will be necessary in order to comply.

So Why Invest?

This prompts the question should you consider funding your IRA or 401K with bitcoin? As bitcoin gains greater acceptance for personal and business transactions across the globe, its value stands to grow.

The value of a traditional IRA, a Roth IRA or a self-directed 401K invested in an IRA stands to grow accordingly. A notable benefit of having a bitcoin IRA or 401K is that you’re invested in a non-correlated asset. In other words, bitcoin’s value can’t be dragged down by economic forces that affect more traditional assets. As more consumers and investors embrace bitcoin globally, its growing value won’t be compromised by a bearish stock market, falling oil prices, or a weakening dollar.

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Nobody can predict the future value of any investment. At this juncture, bitcoin is speculative. But given the rapidly increasing acceptance of bitcoin worldwide, its value can increase rapidly. Since its inception, we’ve already seen evidence of this. Under the circumstances, your IRA or 401K bitcoin investment could turn out extremely profitable over time – especially after you factor in your tax savings.

How It Works

A Bitcoin IRA works very much like traditional IRAs; you rollover your IRA stocks or other securities and use those funds to buy Bitcoins. You can invest in a traditional IRA (with pre-taxed assets) or a Roth IRA (with after-taxed assets) if you’re under 70 ½. Remember, you can’t take distributions in either type of IRA – a traditional or Roth – without a penalty unless you’re at least 59 ½. Generally, employees invested in their employer’s 401K are subject to the same penalty if they take distributions before they’re 59 ½.

As with IRAs or 401Ks in precious metals or collectibles, a bitcoin IRA is handled through a custodian. Since bitcoin IRAs and 401Ks are a recent development in the financial community, only certain custodians will handle them

Whether you have a 401K (through an employer) or an IRA, it would have to be explicitly self-directed for you to earmark it for bitcoin investment. Incidentally, this is also true of precious metals or collectible investments. In other words, as a plan participant, you get to choose the investment vehicle. Although this provision is changing in many 401K plans, most plans still specify a choice of only particular types of investments – usually stocks or stock funds.

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