Every financial news outlet is exploring bitcoin, with some saying it’s the future of global currency and others pointing out the risks that are inherent in an unregulated market. But the first thing anyone considering using bitcoin needs to do is understand it, according to an article in Kiplinger, “The Bitcoin IRA: 5 Essential Facts You Need to Know.”
Bitcoin is a peer-to-peer system through which transactions are executed directly between users. There’s no central administrator, unlike the U.S. dollar, which is produced and managed by the U.S. Treasury and the Federal Reserve. Bitcoins can be exchanged for services, products and other currencies. In addition, this cryptocurrency or “virtual currency” can also be used as an investment.
One way of investing in bitcoin that’s become increasing popular, is the use of an individual retirement account (IRA). While investments in a traditional IRA are handled by the financial institution through which the IRA is established, a self-directed IRA (SDIRA) lets investors buy any asset permitted by law. A SDIRA can hold both conventional assets (stocks and bonds) and alternatives, like gold and bitcoin. However, there’s technically no such thing as a bitcoin IRA. There’s only the SDIRA that can be used for investing in cryptocurrency. If you’re thinking about this, consider these points.
- SDIRAs are evolving. SDIRAs are flexible and can hold diverse investments. Many investors are intrigued with the idea of investing in bitcoin.
- Bitcoin is rising in value. A single bitcoin has gone from a value of 8 cents in 2010 to over $6,000 today, so more people see it as a form of investment. But experts say that a correction could come any day.
- Bitcoin IRA investment viability is suspect. Although bitcoin values have increased dramatically, it’s uncertain how much longer this will last. If you’re looking to invest your IRA in bitcoin, it would be wise to keep it limited to a very small amount of your entire portfolio, because of its speculative nature.
- Bitcoin is banned in some countries. Australia and Canada explicitly permit bitcoins and bitcoin transactions, but Iceland and China prohibit the cryptocurrency or its trading. It’s permitted in the United States, but there’s been a constant debate on how to regulate it. A 2014 IRS guidance stated that it “does not approve IRA investments,” but the agency doesn’t explicitly prohibit them either.
- The IRS is OK with IRA investments into Bitcoins. There’s not really much in the way of specific legal restrictions in the U.S. The IRS currently only prohibits IRA investments in life insurance and collectibles, like stamps, artwork, metals, and coins. Therefore, you’re technically allowed to use your SDIRA to invest in bitcoin, since it’s not specifically named in either of the prohibited investment categories.
A word to the wise: there is considerable risk associated with bitcoin, as there is any unregulated financial investment product. Proceed with great caution.
Reference: Kiplinger (November 27, 2017) “The Bitcoin IRA: 5 Essential Facts You Need to Know”