Should You Invest in Bitcoin in an IRA?

Content provided for general information. Talk to your advisor to confirm the details for your specific situation before taking action.

If you’re going to invest in Bitcoin, it may make sense to hold it in an IRA instead of in a taxable account. Here’s why.

Should you invest in Bitcoin (at all)?

This blog does not give investment advice. I’m not telling you to invest in Bitcoin or to not invest in Bitcoin.

Personally, I like traditional investments. If you own stock, you get a tiny share of every sale a company makes. If you own bonds, it’s just like giving a company a loan with interest.

In my view, Bitcoin is a lot more speculative. Its value is based on potential rather than easily definable cash flows.

A lot of people do like it because if its potential plays out, there’s a potential for a much higher return than traditional investments. I wouldn’t call anyone crazy for investing in Bitcoin as part of a well-diversified portfolio.

Bitcoin in an IRA vs. Not in an IRA

Bitcoin wallets are normally similar to taxable investment accounts.

You may have a capital gain and owe taxes when you sell Bitcoin. If you receive interest on your holdings, you may also have to pay tax on the interest income.

You can also hold Bitcoin in an IRA. Bitcoin inside of an IRA is the same as holding other investments in an IRA.

In an IRA, you don’t owe taxes when you sell. You also don’t owe taxes if you receive interest.

You only owe taxes when you take money out of your IRA. If you use a Roth IRA, you won’t owe taxes at all unless you have an unqualified early withdrawal of Roth IRA earnings.

What if you’re maxing out your IRA and want to invest more in Bitcoin?

Let’s say you already max out your IRA with traditional investments. Do you keep doing that and buy Bitcoin in a taxable account? Or do you invest in Bitcoin in the IRA and invest in stocks and bonds in a taxable account?

Bonds should almost always be the first thing that goes in your IRA. Otherwise, you have to pay taxes on every interest payment.

Stocks vs. Bitcoin is a tougher call. Stocks have taxable dividends, while cryptocurrency investments usually don’t.

On the other hand, if Bitcoin grows faster, it will have a higher capital gains tax. But if it grows slower, you’ll want the capital loss to be in your taxable account so you can deduct it.

Remember, just like you don’t pay taxes on gains or dividends in an IRA, you also don’t get to deduct losses in an IRA.

So it’s really a question of how you think each will grow and how you want to account for the possible risks.

Bitcoin in a Traditional IRA vs. Roth IRA

There are usually two considerations when choosing which type of IRA to use.

First, do you expect your taxes to be higher or lower in retirement than they are today?

  • If you expect them to be higher, use a Roth IRA to pay the taxes now.
  • If you expect them to be lower, use a Traditional IRA to pay the taxes later.
  • Some people split their contributions between both types in case they predict wrong or just to have more options for taking money out later.

Second, for your existing IRA assets, most financial advisors suggest putting the highest-growth assets in your Roth IRA.

That’s because qualified Roth IRA withdrawals aren’t taxed at all. Traditional IRA withdrawals are taxed.

For example, you have $50,000 in a Roth IRA and $50,000 in a Traditional IRA. You want 75% in stocks and 25% in bonds.

  • Put $50,000 in stocks in the Roth IRA
  • Put $25,000 in bonds and $25,000 in stocks in the Traditional IRA

(Other factors may apply. For example, if you’re planning to withdraw from your Roth IRA in the near future or use it as your emergency fund, you may want your Roth IRA to include more conservative investments.)

Where does Bitcoin fall in? Since it began, it has grown much faster than stocks. Lately, not so much.

If it’s only a small part of your portfolio, it should probably go in your Roth IRA.

It may not be a good idea to make it your entire Roth IRA or a large portion of your Roth IRA.

  • If it goes to $0 in a Roth IRA, you made after-tax contributions, can’t deduct your losses, and can’t put money back in your Roth IRA other than new annual contributions.
  • If it goes to $0 in a Traditional IRA, you at least got a tax deduction when you contributed.

On the other hand, if it grows like crazy and you cash out at the right time, you’ll wish it was in your Roth IRA.

There’s no way to get a certain answer. Just like your investment decisions, your tax decisions may or may not work out as you expected.

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