How to save taxes with a Bitcoin IRA
28 Mar, 2023 · 5 min read
Can you avoid taxes by investing in a Bitcoin IRA? Bitcoin is increasingly looked at as an option for retirement, given its outstanding returns in the last decade.
The potential profit scenario of investing in Bitcoin in the long-term comes with a concern regarding taxes. Today, we explore more about Bitcoin and crypto in retirement products (e.g., IRAs, Roth IRAs), its advantages and risks, and the potential tax implications.
In this article:
- Should I put my retirement in Bitcoin?
- Can Bitcoin be in an IRA?
- Can I buy Bitcoin in a Roth IRA?
- Can I buy Bitcoin with a self directed IRA?
- Is a Bitcoin IRA tax-free?
- Are Bitcoin IRA fees tax deductible?
- Do I have to report my Bitcoin IRA on my taxes?
- How to avoid paying taxes on Bitcoin?
- Check how CoinTracking shows you coins with a long-term tax benefit
- The best crypto tax software: CoinTracking
Should I put my retirement in Bitcoin?
Bitcoin was voted the best performing asset of the last decade, with retirement-focused investors looking at it as one alternative in a diversified portfolio. However, you have a multitude of products to consider for a long-term-oriented investment strategy in crypto. Some of them offer more benefits beyond the tax advantages, such as low fees, security, or flexibility.
The first and easiest one, for tax purposes, would be to invest directly in Bitcoin with a long-term (>1 year) holding period and enjoy a long-term capital tax gains rate, effectively avoiding the higher amount of taxes when profiting. The long-term tax benefits of holding crypto are present in many other countries around the world (e.g., Germany).
Beyond long-term holding, you now have the option to invest in a commonly used investment vehicle that gives you indirect exposure to Bitcoin through a Bitcoin futures ETF, which offers lower fees than funds (e.g., Grayscale BTC). Exchange-Traded Funds (ETFs) offer simplicity for traditional investors while still giving exposure to a new asset class.
Finally, investors can look at retirement accounts such as 401(k), Traditional IRAs, and Roth IRAs, which now offer the option to include Bitcoin as one of the investment assets within your account. Bitcoin IRA, Unchained IRA, and many other options exist on the market that serves this need, with clear tax benefits.
Let’s see how a Bitcoin IRA or or Roth IRA can help you minimize taxes.
Can Bitcoin be in an IRA?
In short, yes.
There are multiple ways you can invest in Bitcoin as a part of an IRA. In an IRA, you can make the total yearly contributions, get a tax deduction, and only pay taxes upon withdrawal of your IRA assets. At the time of withdrawal, you’ll be liable for income taxes at a tax rate according to your taxable income level.
There are income limits for making an IRA contribution, depending on your filing status and whether you and/or your spouse are contributing to an employer-sponsored retirement plan.
Also, there is a contribution limit for IRAs each year. This year, the IRA contribution limit is $6,000 or $7,000 if you’re 50 years old or more. With a Bitcoin IRA, you can avoid taxes as you go along investing, but you have to pay them at withdrawal.
Can I buy Bitcoin in a Roth IRA?
Yes. You can buy Bitcoin inside a Roth IRA the same way as you invest in Bitcoin in a traditional IRA. The difference between a Roth IRA and a traditional IRA is on the tax benefits, yearly contributions, and limits.
In 2021, you can invest up to $6,000 in a Roth IRA or $7,000 if you’re 50 years old or more. These are the same limits as in a traditional IRA, but the main difference comes from the tax benefits and income limits. In a Bitcoin Roth IRA, you cannot take yearly tax deductions from your contributions, but you’ll have tax-free benefits when withdrawing.
You can effectively avoid paying taxes by investing in Bitcoin through a Roth IRA.
Can I buy Bitcoin with a self directed IRA?
Yes. A self-directed IRA can be a traditional IRA or Roth IRA, and as we covered above, you can invest in Bitcoin in any of those vehicles. The contributions, tax benefits, and limits will vary depending on the choice of retirement-based investment vehicle.
Is a Bitcoin IRA tax-free?
No. With a Bitcoin IRA, you can get tax deductions based on your yearly contributions, but you won’t get any tax benefits when withdrawing funds. However, it is still a great way to enjoy yearly tax deductions and tax-deferred growth on your crypto investment. This is a clear advantage of investing in Bitcoin in an IRA instead of directly holding Bitcoin as there are no deduction opportunities like this.
Are Bitcoin IRA fees tax deductible?
When you invest in a Bitcoin IRA or Roth IRA, you can face transaction fees, maintenance fees, or setup fees.
Setup fees paid to a third party to set up your self-directed IRA account are not deductible. Account maintenance fees and transaction fees paid by using your IRA funds are not tax-deductible either. However, they can be used to reduce your IRA earnings which will eventually be taxable when you withdraw your IRA assets, except for a Roth IRA, which is non-taxable.
Do I have to report my Bitcoin IRA on my taxes?
You do not need to report transactions in your Bitcoin IRA accounts. However, you will need to report the withdrawal of your IRA assets and pay income taxes on the withdrawals (except for qualified Roth IRA distributions). If you take an early withdrawal of your IRA assets, you may also be subject to an early withdrawal penalty.
How to avoid paying taxes on Bitcoin?
Beyond retirement accounts, there are other ways to legally avoid or minimize paying taxes on Bitcoin. The first one would be to hold Bitcoin in the long-term, enjoying a tax benefited rate across various countries.
Secondly, you can donate to a charitable organization and take a charitable contribution deduction, effectively offsetting your capital gains and saving on your taxes. If you have large capital gains but also have significant unrealized losses in trades that you think you won’t recover, you can try crypto tax-loss harvesting. This strategy consists in selling one of your unprofitable trades and offsetting your large capital gains from your operations, saving on capital gains taxes.
More radical measures include moving between states in the US to more crypto-friendly locations with no income tax, or states with incentives for crypto investors and businesses. Check the top crypto tax-friendly states in the US. You can also move to a more Bitcoin-friendly country such as Portugal, Malta, or Puerto Rico. Check our top crypto tax-friendly countries guide for more information.
Check how CoinTracking shows you coins with a long-term tax benefit:
The best crypto tax software: CoinTracking
CoinTracking covers all your crypto tax needs. With CoinTracking, you can:
- Import (API & CSV) your trades from 110+ exchanges.
- DeFi and NFT support with our ETH+DEX importer.
- Import your Binance Chain, Binance Smart Chain, and MATIC transactions.
- 25+ advanced reports, including which coins offer you a tax-free rate.
- Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
- Generate complete Tax Reports in your country.
Sign-up to CoinTracking today!
Do you have any crypto tax questions? Check our Full Service in the US
CoinTracking also offers a full service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
This can be particularly useful on grey-area matters such as taxes concerning wrapping assets, liquidity pools, yield farming, and others where the tax guidance is still emerging.
Clarify all your crypto tax questions:
- DeFi Taxes: The Complete Guide.
- How to calculate taxes with Bitcoin dollar-cost averaging?
- Do you pay tax on stolen, hacked, or lost crypto?
- FIFO for crypto taxes? Implications of accounting methods.
- NFT Taxes: The Complete Guide.
- 2021’s NFT guide (with taxes).
- Is Bitcoin taxable? The ultimate guide for 2021 taxes.
- Do you pay taxes on Bitcoin debit cards purchases?
- Is Bitcoin taxable? The ultimate guide for 2021 taxes.
- Top crypto tax friendly countries.
- How to reduce your crypto taxes?
- Crypto tax loss harvesting: Here’s what you need to know
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 30+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.