So, you bought some bitcoin or one of the other cryptocurrencies. Outstanding, I sincerely believe that you have made a good investment, albeit a very speculative investment.
For many people perhaps including you, making that initial investment was facilitated quite easily by way of an app on your phone. And hopefully, you’ve probably transferred that cryptocurrency into a digital wallet, for safe keeping. If so, brilliant move. But one last thing I need to mention.
You’re doing this all wrong.
Here’s the picture as I see it. You’ve purchased an asset that has the potential to increase in value, wildly, over the next several years. It’s an aggressive investment that frankly, many people aren’t able to stomach. That level of risk deserves a reward, don’t you think?
You made a small original long-term investment, and let’s say hypothetically in 10 years your, for easy numbers, $5,500 investment is now worth 100 million dollars. Ho Lee Cow Right! Not only are you going to enjoy the profits your investment made, Uncle Sam is also going to enjoy taxing you to Timbuktu on all your capital gains. D ’oh!
Now, let’s look at how you got your self into this taxable mess. You made your purchase with after-tax money, didn’t you? You know, you got your W2 paycheck, paid your bills and had some cash left over, right? You used some of that money to make your purchase, didn’t you?
Thing is, that money you utilized to make the purchase is after-tax money. You already paid the taxes on it via payroll deductions. There’s an investment scenario that you have overlooked, and it’s a massive one regarding cryptocurrency specifically.
You are probably aware of how a Traditional IRA works, right? Here’s a quick refresher – Let say you’re working for a company and every pay period you have money deducted from your check to go into your Traditional IRA – pre-taxed. This means that the money you have going directly into your retirement fund isn’t being taxed right now but rather later, when you withdraw it, whether at retirement or earlier, Uncle Sam is going to tax you at your then current, taxable rate. So, if you are being taxed at 25% now, when you retire, conceivably your tax rate will more than likely drop (because you’re no longer working) to say 12%. When you begin to withdraw from your Traditional IRA, that 12% is what the money coming out will be taxed at. Uncle Sam always gets his money, always. Also, you cannot hold cryptocurrency in a Traditional IRA.
Or you can utilize a ROTH IRA. It’s like a Traditional IRA, except that the money you put into it, has already been taxed. The advantage? Your money grows tax-free. You put money in after you’ve paid taxes on it, and no other taxes are levied on the account (assuming you don’t withdraw your earnings early). Your money then grows tax-free, read that again. Kinda nice to alleviate some of the future concerns of how your investment growth would have been hit with taxes, eh? The catch? You cannot hold cryptocurrency in a ROTH IRA either.
Now regarding cryptocurrencies, one thing you need to understand straight away is that it is an Alternative Investment, it’s not a stock, bond, mutual fund, or an ETF. It’s not currency either. Per the IRS - IRS Notice 2014-21 declares the asset as property for tax purposes, having “an equivalent value in real currency”. Property cannot be held in either a Traditional IRA or a ROTH IRA.
You can hold property in a Self-Directed IRA, however.
This presents you with a unique opportunity, one that could potentially reward you in the years to come.
First off, let’s introduce you to a Self-Directed IRA. Like Traditional and ROTH IRAs – a Self-Directed IRA (SD-IRA) can have the investment in traditional assets like:
- mutual funds
- exchange-traded funds (ETFs)
- public REITs
- money markets
- certificates of deposit (CDs)
What you probably didn’t know is that you can choose Alternative Assets that are not normally offered by traditional financial institutions or even mentioned to you by your current broker such as:
- real estate
- precious metal
- private equity and…
The Self-Directed Roth IRA removes the uncertainty of what future taxes can do to your retirement account. When you retire, your Self-Directed Roth IRA earnings will be exempt from taxes, while your traditional IRA or 401k earnings won’t be. That is, any money that comes out of a Self-Directed Roth IRA after you retire will be tax-free, while money from your traditional 401(K) or IRA will be taxed.
Self-Directed ROTH IRA with Single Member LLC
D’arcy Wealth Management is one of the few Wealth Management firms in the United States that provides an opportunity for our clients to hold cryptocurrency utilizing a tax-advantaged retirement account. Many are unaware that you can hold digital currency inside a retirement account. You can purchase cryptocurrency via your Self-Directed ROTH IRA with a Single Member LLC. What this structure allows is rather quite simple. However, that simplicity can accommodate a complex, and highly speculative investment in a tax-advantaged way, unlike any method of Wealth protection that you have probably been aware of.
We endeavor to recognize the opportunities within global financial markets; by providing guidance to meet the next generation of financial challenges and investment opportunities. We present a different approach to building, managing and preserving your Wealth. Our expertise is in delivering solid investment strategies, superior risk-adjusted returns while adhering to the highest ethical standards and prioritizing your interests above everything else.
Disclosure: I am/we are long ripple, litecoin, bitcon and ethereum.