Crypto Taxes Archives

How To Invest in Bitcoin Within a 401(k)

Posted on April 7, 2023 | by [email protected]

Are you interested in buying crypto in your retirement account, but need to figure out how? Cryptocurrencies like Bitcoin are digital assets, treated as property, that can be purchased, sold, or traded. Whether you want to diversify your portfolio or start investing in digital currency, adding crypto to your 401(k) has many advantages. Keep reading to find out how to invest in Bitcoin within a 401(k).

Benefits of Investing in Bitcoin Within Your 401(k)

Saving money for retirement sets you up for a better future. Investing in Bitcoin within your 401(k) adds the following benefits.

Opportunities for Growth

Cryptocurrencies are digital assets that have increased in popularity due to the potential for explosive profit. The underlying blockchain technology in crypto offers investors more security and freedom over their portfolios. With thousands of crypto platforms, you can diversify your portfolio and potentially increase your wealth.

Many cryptocurrencies, such as Bitcoin, place limits on the number of coins in circulation. The limited supply makes Bitcoin a possible hedge against rising inflation, and encourages periodic supply shock during bull cycles, driving its price higher.

Tax Advantages

When you hold Bitcoin in a traditional brokerage account, you pay capital gains tax if you sell, exchange, or trade for profit. The tax rate you pay is based on your income, filing status, and how long you held Bitcoin before you realized a profit.

If you instead keep Bitcoin in a retirement account, not only will you never pay capital gains tax on any profits, but you also postpone paying taxes until you take distributions at retirement age. In a 401(k) retirement plan, your taxable income may be reduced by any contributions you make. When you retire, you will pay ordinary income tax rates on your distributions. If you expect to be in a lower tax bracket when you retire, you may pay less taxes when you use your retirement account to invest in Bitcoin.

Diversify Retirement Holdings

Holding a variety of investments can insulate your retirement plan from losses. Suppose too much of your retirement account is allocated in a stock that plunges, or you’ve invested heavily in an industry suffering from a market downturn. In that case, a diversified retirement portfolio lessens the risk of loss. Adding crypto to your retirement account can help protect the value of your portfolio.

Should I Invest in Crypto in My 401(k)?

With a crypto 401(k) account, you can invest in digital assets like Bitcoin or Ethereum. Adding crypto helps diversify your 401(k) portfolio. Holding diverse types of investments can lessen the risk of loss if the market declines. Plus, you can realize tax benefits by investing in your crypto 401(k).

Steps To Invest in Bitcoin Within Your 401(k)

How can I invest in Bitcoin within my 401(k)? Follow these key steps to begin investing in your crypto 401(k).

Step 1: Choose Your Crypto-Friendly Retirement Account

Not every 401(k) account provider supports cryptocurrency. If you plan to invest in Bitcoin in your 401(k), make sure the retirement account provider supports crypto transactions. Otherwise, consider another 401(k) provider.

Step 2: Fund Your Account

You need to fund your 401(k) account to begin investing. An easy way to do this is to direct a portion of each paycheck to be automatically contributed to in your 401(k). If you have an existing 401(k) plan, you may wonder: can I transfer my current 401(k) to one invested in Bitcoin? The answer is yes. You can roll over your retirement funds to buy crypto in a new account.

Step 3: Buy Bitcoin and Other Cryptos

Once your 401(k) is open and funded, you can start investing in crypto. However, choosing where to invest your money can be overwhelming. You may stick with well-known cryptos like Bitcoin (BTC) or Ethereum (ETH). Or you may pick a crypto that is newer to the market.

Whatever coin you choose, it’s a good idea to research before investing in crypto. Read the crypto’s whitepaper to learn more about the coin or token’s purpose, and what the project is intended to do. You can read about who is leading the project and how far it has progressed along its roadmap. Other factors to consider before you invest include whether the crypto trades on reputable exchanges and how frequently it is bought and sold.

You might also consider investing in a crypto exchange-traded fund (ETF). A crypto ETF holds a collection of digital assets. With relatively more-diversified holdings, a crypto ETF may experience less market volatility than investing in just one digital asset.

Alternatives to Investing in Bitcoin Within Your 401(k)

Here are a few ways to invest in crypto outside of your 401(k) account.

Traditional Brokerage Account

You can buy, sell, and hold investments through a traditional brokerage account. If you prefer to work with a broker rather than invest alone, you can open a traditional brokerage account at a financial institution or online.

Not every brokerage account supports crypto investments; check with a brokerage before you open an account if you plan to invest in Bitcoin or other digital currency.

Cryptocurrency Exchange

Crypto exchanges offer a platform for buyers and sellers to trade crypto. Different crypto exchanges may support different types of assets. You can choose between decentralized crypto exchanges, which allow sellers and buyers to easily connect through peer-to-peer trading, or centralized crypto exchanges owned and operated by a private company. When trading through a decentralized exchange, you may pay lower fees than if you went through a broker.

Cryptocurrency IRA

If you are self-employed or don’t have access to an employer-sponsored retirement plan, you can invest in Bitcoin through a crypto individual retirement account (IRA). By investing Bitcoin in a crypto IRA, you may be able to take advantage of tax benefits such as deducting contributions and deferring taxes. You never pay capital gains taxes on distributions from a retirement account. The tax is the same whether your investments made money or lost money.

With a traditional IRA, your contributions may reduce your taxable income. You’ll pay tax on your distributions when you retire, but you may still save in taxes if you are in a lower tax bracket.

When you open a crypto Roth IRA, you don’t benefit from reducing your income by your contributions. However, you likely will not pay tax when taking retirement distributions with a crypto Roth IRA. So, you can pay less tax when your portfolio sees significant gains.

Invest Bitcoin in your 401(k) account

Cryptocurrency is a popular investment because of the potential for outsized gains. Portfolio diversification, tax savings, and growth opportunities are many reasons to add Bitcoin to your 401(k). With more retirement accounts designed to adopt digital assets, investing in your crypto 401(k) account has never been easier.

Frequently Asked Questions

Can you put crypto in a retirement account?

Yes, if your retirement account supports digital asset investments.

Can I use my 401(k) to buy cryptocurrency?

You can buy and sell cryptocurrency if you have a 401(k) account and provider that supports cryptocurrency.

Are there fees for investing 401(k) into Bitcoin?

Yes, you should expect to pay fees when you buy and sell Bitcoin or other digital currencies in your 401(k). Check with your provider for details.

What Is A Roth IRA For Cryptocurrency?

Posted on March 31, 2023 | by [email protected]

A Roth individual retirement account (IRA) enables investments in cryptocurrencies for retirement. In addition to offering tax advantages, having a portion of your retirement portfolio in crypto provides diversification.

The decentralized aspect of cryptocurrencies has made the asset class attractive to investors wanting to de-risk away from central authorities controlling their assets. Certain cryptocurrencies have provided investors with tremendous returns, and outperformed competing asset classes and speculative instruments.

Investors can benefit from including crypto in their retirement savings. To do so, it is important to examine several aspects of a Roth IRA cryptocurrency account to increase the possibility of achieving a comfortable retirement.

How a Roth IRA for Cryptocurrency Works

A Roth IRA for cryptocurrencies functions similarly to a Traditional IRA (but with key differences). You can roll over your Traditional IRA into a crypto Roth IRA and make monetary investments into cryptocurrencies, as opposed to equities or other asset classes.

While you cannot directly contribute cryptocurrency to this account, you are entitled to the tax advantages offered by a crypto Roth IRA account.

A Roth IRA requires investors to contribute after-tax dollars to then enjoy tax-free growth. The eventual distributions in retirement are also typically tax-free. A Traditional IRA, conversely, requires pretax contributions, also offers tax-deferred growth, but taxes are instead owed at the time of retirement

A Roth IRA enables you to hold funds in the account for the duration of your life.

Can You Hold Cryptocurrency in a Roth IRA?

To invest in cryptocurrencies for retirement, you will need a self-directed IRA, which can include a Roth IRA, to experience its benefits.

Using a platform that allows retirement investments in cryptocurrencies, such as BitcoinIRA, is required.

Advantages of Opening a Roth IRA for Cryptocurrency

Having crypto in a Roth IRA allows you to enjoy certain benefits that may not be available in other retirement accounts.

Tax Benefits

Investing in a Roth IRA for cryptocurrency requires you to make after-tax contributions. The advantage, however, is enjoying earnings that may grow tax-free for the life of the account.. In other words, you don’t pay capital gains taxes on the crypto in your Roth IRA.

After age 59½, you may be able to withdraw the contributions and earnings without paying taxes or penalties if you’ve owned the account for at least five years.

It’s also possible to qualify for additional tax credits such as the Retirement Savings Contribution Credit, but eligibility depends on your adjusted gross income and contributions.

Growth Potential

One of the primary allures of investing in cryptocurrencies are the returns. Bitcoin and other popular cryptos have provided significant returns within relatively short timeframes.

The S&P 500 index has provided average annual returns of 10%, whereas Bitcoin has surged several hundreds of percent during bull market rallies, sometimes lasting months.

A Traditional IRA requires you to take distributions starting at the age of 73, but a Roth IRA doesn’t have a required minimum distribution rule.

Investment Diversification

Diversification helps investors offset profitable assets against the ones that have lost value. Cryptocurrencies tend to have an inverse relationship with the dollar. When the dollar’s value decreases, cryptocurrencies rise.

The value of cryptocurrencies usually increases at a higher rate than the dollar’s value during bull runs. The returns gained on cryptocurrencies when offset against the dollar’s losses can result in significant profits, rather than merely a balanced account, especially in terms of purchasing power.

What to Know Before Opening a Roth IRA for Cryptocurrency

You should consider several factors before opening a Roth IRA for cryptocurrency to ensure that it aligns with your investment goals.

Contribution Limits

For the 2023 fiscal year, your contributions to a cryptocurrency IRA account cannot exceed $6,500 if you’re younger than 50. A $7,500 limit applies to individuals older than 50.

Investment Risk

Cryptocurrency prices are highly volatile. Although these assets can provide high returns, some cryptos have lost more than 90% of their value during a crash or bear market.

Unrealized profits do not grow retirement accounts, so it’s important to monitor the performance of your assets and lock-in profits when the value of your cryptos appreciates.

Develop a Strategy

Not all cryptocurrencies provide returns, and some are riskier than others. It’s important to research cryptocurrencies to understand their performance history, tokenomics, and capabilities.

Doing so will provide perspective on the risk level of each asset and help you decide when to buy and for how long to remain invested before taking profits.

Choose the Right Platform

A sound investing strategy can be realized only if used on the right platform. Your assets should be secure, and the platform should provide you with 24/7 access to your account. Before you begin to invest, the ideal platform will provide a plethora of information about crypto retirement investing and its product offerings. You should scrutinize the platform’s fees, ensuring they’re reasonable and unhidden, such as the service that BitcoinIRA offers.

Optimize Your Retirement Savings in a Crypto Roth IRA

A crypto Roth IRA enables you to add cryptocurrencies to your retirement savings and benefit from the tax advantages. Various benefits are available for this investment strategy, but you should also consider the risks and contribution limits.

The likelihood of a comfortable retirement is increased by investing with the right platform, and having a sound strategy that involves thorough research of how cryptocurrencies have performed.

FAQ

Can you set up a Roth IRA for cryptocurrency?

Yes, you can set up a self-directed Roth IRA that will enable you to invest in cryptocurrencies.

How can you avoid paying taxes on a Roth IRA for cryptocurrency?

Contributions made to a Roth IRA for cryptocurrency comprise after-tax dollars. Investors don’t pay capital gains taxes on crypto earnings in this account, and distributions taken at retirement age may also be tax-free.

How do you convert cryptocurrency holdings to a Roth IRA?

You cannot contribute cryptocurrencies directly into a Roth IRA.

A photo of a calculator displaying the word "TAX," with a hand in front of it holding a physical Bitcoin.

Is a Crypto IRA Tax Deductible?

Posted on March 9, 2023 | by [email protected]

The growing popularity of cryptocurrencies has resulted in many investors adding them to their retirement portfolio. A crypto individual retirement account (IRA) offers investors several benefits, but also carries risks.

It’s important for investors to assess the tax implications of investing in a crypto IRA, and how it compares to Traditional, Roth, and SEP IRAs. Investors may be eligible for tax advantages if contributing to a specific crypto IRA, but it’s necessary to know how to utilize them.

BitcoinIRA details the key information to know about crypto IRA taxes to optimize the experience and strive for a comfortable retirement.

How Crypto Taxes Work

Cryptocurrencies are classified as digital assets. The IRS treats cryptocurrency similar to other growth assets such as stocks, property, and bonds. Digital asset gains are taxable, and you may need to report certain transactions on your tax return.

Taxable crypto transactions include the sale of digital assets, receipt of digital assets as payment for goods or services, and exchange of digital assets for property, goods, and services.

The IRS uses several factors to determine your tax rate:

Income earned
Tax filing status
Period of asset ownership before disposal

Crypto IRA Tax Implications

Cryptocurrency held in an IRA isn’t subject to capital gains tax; however, the specific tax implications depend on the type of IRA you own. Using an IRA to invest in crypto has short-term and long-term implications. Some IRAs offer tax deductions on contributions, but not on distributions taken at retirement age. Other IRAs don’t provide a tax break on contributions, but distributions are typically tax-free.

Traditional IRA contributions use pre-tax income, and may be deductible the year you make them. The tax is deferred, meaning you receive upfront tax relief, but distributions at retirement age are taxed. Deductions are limited if you or your spouse are covered by a workplace retirement plan, or your income exceeds specific levels.

Your IRA contribution amounts are limited. In 2023, the yearly contribution for Traditional IRAs and Roth IRAs combined cannot exceed $6,500. Individuals older than 50 years have an annual limit of $7,500.

Roth IRA

Investors who prefer to be taxed on their retirement contributions can opt for a cryptocurrency Roth IRA. The advantage of using this retirement option is that investors are taxed for retirement while earning an income. Distributions taken at retirement age are typically tax and penalty-free, enabling individuals to receive the full amount withdrawn.

You’re not required to report Roth IRA contributions on your tax return. Your IRA custodian will report these contributions to the IRS on Form 5498 and you will receive a copy this Form for your records. The same contribution limits apply to Roth IRA accounts as Traditional IRAs.

Investors who believe they’re going to be in a higher tax bracket in retirement tend to prefer Roth IRAs. Even if Bitcoin’s value were to rise exponentially, Roth IRA investors would not owe taxes because the account is funded with after-tax dollars.

SEP IRA

A Simplified Employee Pension Plan (SEP) enables business owners to contribute to both an employee’s retirement account and their own retirement savings. For employees to participate in a SEP IRA, they must be at least 21 years old, have worked for the employer at least three of the last five years, and have received a minimum compensation of $750 for the year 2023.

The main advantage of a SEP IRA is that the annual contribution limits are higher than Traditional and Roth IRAs. Self-employed individuals can contribute up to 25% of annual net earnings or up to $66,000 for 2023.

Nondeductible IRA

A nondeductible IRA is funded with after-tax dollars. Although you can’t deduct contributions from your income tax, they grow tax-free. Contributions that produce returns or dividends aren’t taxed if they remain in your account.

As mentioned, the key difference between contributing to a nondeductible IRA and a Traditional IRA is that you cannot deduct contributions; regardless, income limits are applicable to Roth and Traditional IRAs. However, the tax benefits available to individuals contributing to a Traditional IRA aren’t available with a nondeductible IRA.

The annual contribution limit for a nondeductible account is $6,500 in 2023 for individuals under 50 years old, and $7,500 for those 50 and older.

Self-Directed IRA

A self-directed IRA usually offers the same tax benefits as a Traditional or Roth IRA, and has the same contribution limits. However, it’s viewed as an alternative investment account, enabling investors greater asset diversification.

The account holder manages the account, enabling the addition of assets commonly not permitted by most custodians in an IRA, such as cryptocurrencies. A self-directed IRA is available as a Traditional or Roth IRA account, through providers such as BitcoinIRA.

How to Obtain Crypto Tax Deductions

Investors not using retirement accounts can use several strategies to qualify for crypto tax deductions. The easiest way is to own your crypto investment for at least a year before selling it. After that period, you qualify for a long-term capital gains rate.

You can lower your tax rate by strategically lowering your salary, though this is understandably a less popular approach. You could also sell assets at a loss, then realize losses to offset capital gains.

Benefit from Investing in Crypto with an IRA

Investors wanting to diversify their retirement portfolio can add crypto to it. It’s important that investors assess the different IRA tax implications to determine the most suitable one for their investment goals.

Contributions to a Traditional Crypto IRA can be tax deductible, and investors can use several strategies to optimize their returns and tax advantages.

Frequently Asked Questions

Are crypto investments tax deductible?

Contributions to a Traditional Crypto IRA can be tax deductible. Whether investors are taxed on the contributions or the distributions depends on the type of crypto IRA account they choose.

How do I report crypto on my taxes?

Individuals need to report their income from cryptocurrencies as well as gains and losses. This is made simple when investing in a crypto IRA – see our guide.

How do you save on crypto taxes?

When it comes to retirement savings, use of a crypto IRA allows investors to contribute without penalties or taxes using after-tax dollars, or use pre-tax dollars for tax-deductible contributions, and only owe at retirement age.

Crypto coins sit beside a legislative house with a bitcoin symbol on top.

Secure 2.0 Act Lets You Boost Your Retirement Savings

Posted on February 22, 2023 | by [email protected]

The Securing a Strong Retirement Act, also known as the Secure 2.0 Act, was finalized in 2022 across two pieces of legislation from the House of Representatives (H.R. 2954) and U.S. Senate (S.1770). Several of the bill’s provisions come into effect both this year, next year, and beyond, which means understanding its advantages is important for retirement investors.

The primary goals of the Secure 2.0 Act are to encourage people to save more for retirement, improve retirement rules, and reduce the cost to employers of setting up retirement plans. Read on to understand the changes and improvements below, and how they can boost your retirement savings.

Changes to Required Minimum Distribution (RMD) Lengthen Savings Time

The Secure 2.0 Act aims to significantly improve retirement savings choices, and expands upon the original “1.0” version from 2019. The legislation contains a variety of changes and provisions related to retirement accounts, including several of interest to cryptocurrency investors and holders of digital assets within these accounts. Below are the changes at a glance:

RMD age increased from 72 (2022) to 73 (2023)
Age will increase again to 75 in 2033
The penalty for not taking an RMD decreased from 50% to 25%

Firstly, the bill increases the RMD age from the prior 72 years to 73 years old for 2023. In 2033, the RMD age will further increase to 75. This brings added flexibility and gives investors more time to save, though it’s important to note that those already underway with their RMDs from age 72 in 2022 will need to continue their original distribution schedule.

Penalties have also been reduced for failing to take an RMD, now comprising 25% of the RMD value instead of 50%. Additionally, if failure to take an RMD is resolved expeditiously, the 25% penalty may decrease further to only 10%.

Exciting Increases in Retirement Contribution Limits

Beyond RMD changes, the Secure 2.0 Act also boosts retirement contribution limits, meaning individuals can save more for retirement faster, should they choose. This is potentially and especially powerful to cryptocurrency retirement investors, considering the performance track record of the asset class.

For 2023, the IRA contribution limit has increased to $6,500 for individuals under age 50, and $7,500 for individuals over age 50. For 401(k) plans, the contribution limit will increase to $22,500, up from $20,500. Also beginning in 2023, contributions to SEP and SIMPLE IRAs are now Roth eligible.

Beginning in 2024, the IRA catch-up contribution limit will change from $1,000 for individuals over age 50 to a limit indexed to inflation each year based on cost-of-living adjustments (COLA). Considering the inflationary behavior of the U.S. dollar in recent years (crypto enthusiasts tend to know this well), this is a welcome change.

Finally, beginning in 2025, the 401(k) catch-up contribution limit will increase for individuals between the ages of 60 and 63 to at least $10,000, and will also adjust for inflation starting in 2026. Similar to how Social Security has its own COLA that determine its increase each year, catch-up contributions described above now operate similarly, helping perpetuate the idea that it’s never too late to save for retirement. Combined with the potential of cryptocurrency in your retirement account, the increases may be powerful incentives for retirement savings late-starters.

Amendments to Qualified Charitable Distributions

Another provision of the Secure 2.0 Act concerns qualified charitable distributions. Starting in 2023, individuals over the age of 70 ½ may elect a one-time gift of up to $50,000 to either a charitable remainder unitrust, charitable remainder annuity trust, or charitable gift annuity. In 2024, like with the aforementioned catch-up contribution limits, the qualified charitable distribution limit will be indexed for inflation.

New Rollover Choices and Emergency Flexibility

The Secure 2.0 Act legislation also contains provisions granting 529 plan assets eligibility to be rolled into a Roth IRA for the beneficiary after 15 years (additional eligibility and contribution limits apply). This grants new flexibility in moving assets and funds between after-tax retirement vehicles, including mutual funds, ETFs, and other similar investments where investment value grows on a tax-deferred basis (see our handy guide for more on reporting retirement taxes).

Lastly, several sections of the bill expand access to retirement funds ahead of retirement age under certain circumstances. For example, section 115 allows participants to access up to $1,000 (once yearly) for emergencies, including family costs or personal reasons, without paying 10% early withdrawal penalties. Elsewhere, section 127 permits employees to open a Roth emergency savings account containing up to $2,500 per participant, beginning in 2024. Domestic abuse survivors are now allowed to withdraw significant amounts of funds from retirement accounts early without penalty, as are victims of federally declared natural disasters.

Overall Implications of the Secure 2.0 Act

In total, the Secure 2.0 Act loosens and expands contribution limits and reduces friction and pain points from the retirement experience over time. It also attaches the yearly increase of certain limits to an inflation-adjusted growth schedule (a benefit well understood by cryptocurrency enthusiasts), and creates provisions for victims of violence, emergencies, and disasters.

For cryptocurrency retirement investors, these improvements largely mean more dollars individuals can contribute toward one of the top-performing asset classes, with few rivals in the past decade. In crypto, and especially during and shortly after crypto winter, every dollar counts toward the opportunity to realize a dream retirement on, or even significantly ahead, of schedule.

Cartoon people in an urban setting surrounded by logos of popular cryptocurrencies

Why We’re Sweet on Crypto IRAs

Posted on February 13, 2023 | by [email protected]

Valentine’s day is upon us, and with tax season in full swing, we heart the opportunity to explore the advantages of crypto IRAs for retirement, to build nest eggs for what, and who, we love most. As a modern investor, you may be sweet on adding digital assets to your retirement portfolio, and there are several ways in which crypto investing decisions can affect or improve your personal, love, and family life. Investing in crypto via a self-directed IRA brings together the best of old and new, maximizes efficiency and peace of mind, can secure your financial future, and allows you to focus on loved ones, or that special someone, rather than endless tokenomics and charts.

Best of Old and New Loves: Gain the Perks of IRAs and Crypto

Certain components of cryptocurrency can be confusing, if not intimidating, to those from the traditional investing world. In particular, this can be woefully apparent when attempting to understand blockchains, consensus methods, complicated game theory, or DeFi protocols. Can significant exposure to this asset class be achieved without massive time investment, or it becoming a second job? Thankfully, the answer is yes.

Crypto IRAs allow you to invest within a time-tested, insured*, and reliable retirement vehicle, while still reaping crypto benefits like decentralization and the potential for outsized returns. Investors can learn the basics of the coins and tokens available, then invest in one, or multiple digital assets of their choosing. Like with any retirement account, consistent and regular contributions can be made to emulate dollar-cost-averaging, eliminating the need to trade ups and downs or “catch dips,” as regular, consistent investment captures all price levels. Saver IRAs are also available to automate crypto investing. are also available to automate crypto investing.

While many are passionate about crypto, many would much rather direct their time and energy to their significant others and loved ones. Crypto IRAs enable both!

Expedite a Better Future With Crypto Investing

Despite crypto winters, there’s little denying that tremendous price performance and return on investment (amid volatility) are a predominant part of what make crypto assets immensely popular.

For older investors, the benefits of a crypto IRA are thus twofold. For one, a trusted platform like BitcoinIRA stores your assets with a qualified custodian to ensure maximum peace of mind, something too-often missing from riskier crypto plays as digital currencies mature through their “wild west” phase. At the same time, the unprecedented performance of crypto (as demonstrated by Bitcoin’s rise, among others) means that it’s never too late to start saving for retirement and prioritize those you love.

In the 2018 bear market, Bitcoin’s price bottomed below $3,200. In the 2021 bull run, its price topped out at $68,000! Capturing such strong price performance (over a 20x gain on investment from bottom prices) arguably transforms approaches to retirement, allowing latecomers to still prosper, or those on-track to reach their goals sooner.

On the other hand, research has shown that the primary reasons millennials have shied away from marriage and starting a family more so than past generations are economic. Once again, crypto IRAs can help. Bitcoin was designed to combat the issues of the 2008 financial crisis and beyond, including inflation and falling purchasing power. Allocating a certain (or aggressive, if you’re younger or a latecomer) percentage of retirement investment to crypto has the potential to keep ambitious retirement goals alive, even during tough times.

Tax Advantaged Retirement Accounts

It’s safe to say there’s nothing romantic about taxes. When investing in crypto via self-custody, or even on centralized exchanges, individuals must manually track their gains and losses in order to correctly file tax returns when the time comes to swap or cash out.

Rather than be mired in records and paperwork on Valentine’s Day ahead of tax season, a crypto IRA keeps things straightforward and simple. Taxes are typically owed on income rather than capital gains, either via already-taxed money used to invest (Roth IRA), or at the time of retirement on distributions (Traditional IRA). For more on this, take a look at our guide to crypto taxes in retirement accounts.

Though crypto can be highly exciting, engaging, and even addicting, it’s important to remember some of the core goals of saving for retirement. For many, spending more time with loved ones ranks number one atop that list. The power of crypto and the flexibility of IRAs have the potential to realize, and even quicken, this objective. Which is why not just on Valentine’s Day, but all year long, we’re sweet on crypto IRAs.

*Insurance may vary based on asset chosen and custody solution available.

Crypto taxes: a man carries a Bitcoin in front of a laptop and tax forms

How to Report Cryptocurrency Retirement Accounts on Taxes

Posted on February 8, 2023 | by [email protected]

Taxation reporting rules for cryptocurrency held inside retirement accounts are different from other cryptocurrency transactions. Cryptocurrency transactions are taxable by law. Investors typically need to report capital gains and losses realized from their cryptocurrency holdings. The Internal Revenue Service (IRS) also requires taxpayers to report income earned from digital assets.

Fortunately, those buying cryptocurrency within a retirement account can access tax advantages, including avoiding capital gains taxes entirely. As with other types of retirement accounts, crypto investors pay income taxes either before contributing, or upon distribution at retirement age. BitcoinIRA has simplified cryptocurrency taxes with a detailed guide on how digital assets are taxed, the forms required, and how crypto is reported on tax returns.

Why It’s Important to Report Cryptocurrency Retirement Accounts on Taxes

It’s important to report cryptocurrency account activity to the IRS because it’s required by law. Generally, the IRS considers cryptocurrency to be property, and it is taxed as such. Owning cryptocurrency in a retirement account, however, allows investors to minimize taxes on profits that would otherwise be subject to capital gains tax.

After selling cryptocurrencies, you’d typically need to report the capital gains or losses on your tax return. By investing within a retirement account, you instead only need to report income taxes (or already used dollars), a significant advantage. In 2023 the IRA contribution limits will increase, allowing you to save even more. Let’s dig deeper into the tax benefits.

How Cryptocurrency Retirement Accounts are Taxed

Profits realized from assets held in retirement accounts are typically taxed either as income before you invest, or at the time of retirement and distribution, depending on whether you choose a Roth IRA or a Traditional IRA.

For Traditional IRAs, your contribution may be tax deductible. The deductible amount is determined by your modified adjusted gross income (MAGI). Whether or not you also have a retirement plan provided by your employer also plays a role.

For Roth IRAs, your contribution limit is affected by your MAGI, as computed for Roth IRA purposes.

Traditional IRA Tax Deduction Limits

The tables below outline deduction limits and the effect of MAGI on deductions for 2023. If you are covered by a retirement plan at work, use this table to determine if your MAGI affects the amount of your deduction.

[table id=1 /]

Source: https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work

If you’re not covered by a retirement plan at work, use the below table to determine if your modified AGI affects the amount of your deduction.

[table id=2 /]

Source: https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work

Roth IRA Contribution Limits

Roth IRAs also have contribution limits potentially affected by MAGI. The table below shows whether your contribution to a Roth IRA is affected by the amount of your MAGI as computed for Roth IRA purposes. Use this table to determine if your MAGI affects your potential maximum contribution totals.

[table id=3 /]

Source: https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022

What Forms Do I Need for Crypto Retirement Account Taxes?

Depending on the type of cryptocurrency transactions that occur in your retirement account, you’ll need the appropriate forms for submitting your taxes.

Form 5498

IRS Form 5498 is used to report your annual contributions, rollovers, conversions, recharacterizations, and year-end fair market values for Traditional, SEP, SIMPLE, Roth, and Inherited IRAs. It also reports the amount of your Required Minimum Distribution that you must take, if applicable.

Investors can expect to receive form 5498, which will reflect their IRA fair market value as well as any contributions the preceding tax year. Your IRA custodian will send a copy of the form to you, as well as to the IRS. This year, forms are due to the IRS by May 31st.

Form 1099-R

IRS Form 1099-R is used to report distributions from your retirement accounts, including but not limited to 401(k)s and IRAs. If you received a distribution from your retirement plan for more than $10, you can expect to receive this form.

Form 1099-R also tracks rollovers from one IRA custodian to another, as well as any early distributions, which typically result in a 10% additional tax if taken before the retirement age of 59 ½. Exceptions may include disability, death, an IRS levy, or medical expenses exceeding 7.5% of AGI.

How to Report Cryptocurrency on Tax Returns

Completing cryptocurrency tax returns is achieved with three steps.

Step 1: Track and Review the Transactions in Your Retirement Account

Be sure to track and understand the performance of the assets in your retirement accounts. When your custodian mails you tax forms, check them thoroughly and make sure the information is correct. Remember, in retirement accounts taxes are owed either on distributions or contributions depending on the account type, not on capital gains.

You can determine gains or losses of each transaction by calculating the difference between the cost of the asset and the value at which it was sold. However, this is only for your own tracking, not tax purposes.

Step 2: Confirm You Received the Correct Tax Forms

As mentioned, Form 5498 and Form 1099-R are the documents you can expect to receive from your custodian, who also reports them to the IRS. The former is used mainly to report contributions and the year-end fair market value of the account, while the latter primarily reports distributions. Typically, taxes are owed on distributions from Traditional and other IRA types, because the contributions are pre-tax, and thus tax is paid upon receiving funds at retirement age. For Roth IRAs, taxes are paid upfront, as post-tax income is used to contribute.

Step 3: Finalize Your Tax Forms

If the forms you received from your retirement account custodian look correct, then you are all set. Simply use the forms to complete your tax return. If you identify errors or have questions, be sure to contact your custodian in advance of the tax deadline to make sure any irregularities are addressed and corrected.

Make Crypto Tax Filing Simple for Retirement Accounts

Filing your crypto taxes isn’t intimidating when you know which forms to verify and the process to complete your return. Use the steps in this guide to stay on top of your crypto taxes and comply with IRS rules.

Q: How do I report taxes on crypto in retirement accounts?

A: Your retirement account custodian will send you the appropriate forms based on your contributions, distributions, and plan type. These forms will also be reported to the IRS concurrently. Then, you can use the forms to prepare your tax return.

Q: Do I need to complete and send any forms myself?

A: You do not need to complete the forms yourself or send them to the IRS. Simply review the forms received from your IRA provider and verify that the information is correct. Also confirm that the correct forms were received (Form 5498, Form 1099-R, or both) based on your account activity for the year. If there are any issues, contact your custodian. When you submit your tax return, make sure you note any amounts listed in the forms.

Q: What happens if I don’t report my crypto on taxes?

A: Not reporting your crypto taxes would result in incurring interest, penalties and possibly being criminally charged. However, this process is simple for those holding crypto in retirement accounts, as your custodian will send your tax forms to both you and the IRS. You will simply report the amounts listed in the forms on your tax return.