One of the most popular quotes attributed to Benjamin Franklin is that “in this world nothing can be said to be quite certain, except death and taxes”. Taxes are one of the unavoidable facts of modern living and you’ll most likely run into serious troubles if you don’t pay your taxes in full and on time. However, taxes are mostly unfair and it hurts many people to give a significant part of their income to Uncle Sam just so they could be law-abiding citizens.
The worst part is that the rich folks, politicians, and people in the corridors of power pay relatively lesser taxes than the average Joe. In fact, folks close to the corridors of power have built in loopholes into the taxation laws in order for them to avoid paying taxes legally. Some folks also embrace offshore bank accounts as a means to store their wealth while reducing their tax liabilities.
However, you don’t need to be in the corridors of power to beat Uncle Sam in the tax game. More so, you don’t need to go through the stress of opening an offshore account. This article provides information on how you can invest in Bitcoin tax-free and legally without incurring the wrath of Uncle Sam using a Bitcoin IRA Account.
What you need to know about Bitcoin and taxes
To start with, Bitcoin is likely to enjoy a more favorable tax environment in Europe. In 2015, The European Court of Justice Ruled that Bitcoin and other cryptocurrencies are exempt from value added tax (VAT). In essence, you’ll be more able to exchange Bitcoin tax-free in Europe than in any other part of the world. Many EU member nations such as Belgium, Spain, and Switzerland have adopted the rule to provide Bitcoin VAT exemptions.
The U.S. tax authority, Internal Revenue Service (IRS) doesn’t seem to be particularly endeared to Bitcoin and it has ruled that Bitcoin is taxable. Based on IRS guidance notice 14-21, the law regards Bitcoin and other cryptocurrencies as capital assets. In essence, the IRS says your Bitcoin is similar to stocks and bonds; hence, you must disclose and account for your Bitcoin losses and gains in the same way that you’ll account for stocks losses and gains.
Nonetheless, you should note that it is not easy to report and tax Bitcoin holdings because it is very hard to determine the fair value of Bitcoin. Hence, many people tend to avoid Bitcoin altogether in order to avoid making mistakes that could put them on the hook for misfiling or tax evasion. However, a Bitcoin IRA Investment can help up invest in Bitcoin tax-free without running the risk of flouting the law.
Here’s out to beat Uncle Sam to for tax-free Bitcoin investments
The first thing you need to understand about investing in Bitcoin tax-free is that you’ll need a Self-Directed IRA. You can Rollover your 401k into Bitcoin using a self-directed IRA and the Bitcoin in your self-directed IRA account will be tax-free. However, any other Bitcoin that you hold outside the Bitcoin self-directed IRA account will be subject to taxes because the U.S. government treats Bitcoin as an asset.
To start with, you’ll need to contact a company that helps people to setup a self-directed IRA and inform them of your intention to open a self-directed IRA. You can only invest Bitcoin in a self-directed IRA – your 401K or ROTH IRA might not be suitable for tax-free Bitcoin investments.
The company setting up your self-directed IRA will send you some forms that will be used for the incorporation of an “investment” LLC. You’ll be designated as the manager of the LLC – and a new company that we will call XYZ IRA Services (for example) will be the sole member.
You’ll also be asked to fund the XYZ IRA Services and forms to initiate the funding will be provided to you. You can fund XYZ IRA Services by moving money from your 401K, your ROTH IRA, or by setting up a new IRA contribution strategy by wire transfer or check.
After you have funded XYZ IRA Services, you can send an Investment Authorization form to XYZ IRA Services with directions to invest in the LLC. You’ll also need to open a business checking bank account in the name of the LLC.
Once the business bank account is up and running, you can simply buy Bitcoin for your IRA from a Bitcoin exchange. Once the Bitcoin is deposited in your wallet, you’ll only need to sit back and watch your investment grow without having to worry about paying the prevailing capital gain tax. Rinse and Repeat!