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.

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.

We strongly recommend, for specific answers to any questions about the tax implications of your IRA, that you consult your qualified tax advisor.