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Source: Сointеlеgrаph

As the cryptocurrency market matures, more governments around the world are introducing laws to tax income from cryptocurrency-related activities, with traders often triggering taxable events that can lead to future complications.

Tax evasion is illegal, but there are legitimate ways to avoid taxable events while holding your crypto holdings: Roth IRAs. These are Individual Retirement Accounts (IRAs) with a special type of preferential tax system.

Using IRAs to prevent taxable events with crypto investments is a strategy that has been under consideration for some time since last year, North American mining and hosting company Compass Mining offered BTC users a mining solution directly into their IRAs.

Before diving in, it’s important to note that Roth IRAs are only available in the United States, although other countries often have their own forms of investment vehicles with tax benefits. Often, stocks with significant bitcoin exposure, such as MicroStrategy, have to be used as a proxy for some of these tools.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account where investors contribute after-tax earnings. What makes a Roth IRA different is that the funds that investors place in these savings accounts can increase without paying taxes and can be withdrawn without paying any other taxes after they turn 59.5 if the account was open for at least five years.

In essence, the Roth IRA believes that since taxes have been paid on funds deposited into the account, investors do not need to pay any additional taxes as long as they meet the specific conditions outlined above.

Roth IRAs can be funded in a variety of ways, in addition to regular contributions, which must be made in cash. Assets allowed in Roth IRA accounts include stocks, exchange-traded funds, money market funds, bonds, mutual funds, and cryptocurrencies.

The Internal Revenue Service (IRS) does not allow direct deposits of cryptocurrencies into these accounts, but these are various Bitcoin IRA solutions that are designed for investors to store cryptocurrencies in these accounts. It is worth noting that annual contributions to Roth IRAs are capped according to IRS specifications, and that investors can hold Roth IRAs for as long as they wish, as there are no mandatory minimum payouts.

Should I add crypto to a Roth IRA?

Cryptocurrencies are known for their extreme volatility, which means that they are not suitable for every investor. More conservative investors are likely to be happier owning bonds, mutual funds, and exchange-traded funds, while investors with a greater appetite for risk may consider investing in cryptocurrencies.

The growth potential of crypto assets in the portfolio is sufficient to attract investors who believe that the popularity of cryptocurrencies will continue to grow as the infrastructure around them increases accessibility and new crypto-related products and services are created. It is worth noting that this upside potential comes with increased risk.

Because Roth IRA tax-free withdrawals require an account to be at least five years old, cryptocurrency investors looking to take advantage of them should always be prepared to hold onto their funds for the long haul.

Chris Kline, co-founder of cryptocurrency IRA platform Bitcoin IRA, told that there are no tax breaks on contributions to Roth IRA accounts, but there are tax breaks on distributions:

“If you have a longer time horizon in bitcoin and cryptocurrencies, a Roth IRA could be an attractive choice for those looking to take advantage of a long-term digital asset offering.”

According to Kline, cryptocurrencies “will destroy the very fabric of our daily lives in the same way that the Internet has destroyed communication, and email has destroyed the post office.” The co-founder of the Bitcoin IRA added that while real estate and gold were prime examples of diversification in the past, the cryptocurrency has “established itself as an alternative in today’s economy.”

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Kline added that cryptocurrencies could offer “an alternative path forward for people of all ages” and that there has been a surge in interest in investing in crypto assets to diversify.

Kunal Soni, CEO of research firm Kalkine Group, does not seem to agree with Kline’s approach. Speaking to , Soni said that if a person “has put in the time and work to make money, ideally they shouldn’t be investing in extremely risky assets like cryptocurrencies.”

Otherwise, he added, it would “defeat the idea of ​​investing in retirement.” Sony warned that cryptocurrencies are not just bitcoin (BTC) and that betting on them increases the risk of investors falling prey to Ponzi schemes.

As an investment category, cryptocurrencies “might not be that bad,” he said, as these assets could become “the biggest contributor to the total Roth IRA when the contributor retires and plans to withdraw funds.” Once again, their potential overperformance is weighed against their risk.

For long-term investors expecting such huge returns, staking cryptocurrency in a Roth IRA allows them to realize their capital gains without paying taxes, although they will have to go through ups and downs for a while.

Portfolio diversification

The extreme volatility of cryptocurrencies makes them not such an easy investment when it comes to retirement, as the jury cannot decide whether including cryptocurrencies in a 401(k) retirement plan is smart financial planning or playing for the future.

For Sony, investors must have a predetermined strategy for their Roth IRA. The CEO noted that a 60/40 portfolio with more stocks than bonds “has long been considered balanced and financially sound” but suggested that cryptocurrencies are changing that:

“Now that you have the opportunity to hold the relatively most volatile asset, cryptocurrency, you can consider a new strategy, say 50/40/10. Here, 10% can move to a new asset class that includes cryptocurrencies. Investors should be able to change the share of the distribution in accordance with their risk appetite.

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Due diligence, Sony concluded, is critical as Roth IRAs are often “regarded as one of the best investment vehicles for low-income young people.”

Speaking to , Kevin Maloney, acting CEO of cryptocurrency retirement account provider iTrustCapital, said that volatility is actually “one of the main reasons many investors choose to use a Roth IRA or any other type of IRA to invest in crypto.” . He added that even day traders can benefit:

“For those who want to ‘day trade’ due to crypto volatility, an IRA is still a solid option because they won’t pay annual taxes on their profits until they receive distributions.”

Whether or not investors want to add cryptocurrencies to their Roth IRA accounts, it is important to note that cryptoassets are only available to these accounts through custodians, who can charge hefty trading fees.

Each investor should analyze what type of investment vehicle is best for their situation and risk appetite. Roth IRAs can be extremely beneficial for long-term investors, as the IRS has taxed cryptocurrencies as property since 2014, and capital gains tax can be levied on depreciable assets.

The views and opinions expressed do not necessarily reflect those of . Every investment and trading step involves risk, you should do your own research when making a decision.

Source: Сointеlеgrаph

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