The IRS allows self-directed IRAs to invest in certain physical assets and property if they’re held by an approved custodian. The agency issued guidance in 2014 noting that for federal tax purposes, virtual currency would be treated as property, which would seem to open the door for investors who want to use an IRA to invest in cryptos.
The question is, just because they can, does that mean they should?
“There’s no question that investing in digital currencies is highly speculative. We are in the early days of the Wild West, and it is very difficult to determine with any degree of confidence what’s going to happen to any of the digital currencies,” Ric Edelman, chairman and co-founder of Edelman Financial Services, told ThinkAdvisor.
(Related: Will Bitcoin Ever Be a Fiduciary Asset?)
He pointed out that there are over 800 digital currencies currently, though it’s impossible to say which of the current tokens will prevail.
“We don’t know which platform is going to survive. We don’t know what governments around the world are going to do, or central banks around the world. They may create their own fiat digital currency.”
The Reserve Bank of India is looking into doing just that, the Economic Times reported in mid-September. The publication quoted RBI Executive Director Sudarshan Sen, who said at a recent India Fintech Conference, “Right now, we have a group of people who are looking at fiat cryptocurrencies. Something that is an alternative to the Indian rupee, so to speak. We are looking at that closely.”
Meanwhile, China has banned the use of initial coin offerings to raise capital and plans to ban trading of Bitcoin and other digital currencies, Bloomberg reported.
These are all challenges that advisors should address with their clients if they’re thinking about sinking retirement assets in cryptocurrencies.
One company is trying to make it easier for audacious investors who want to cash in on the growth potential of digital currency.
Bitcoin IRA is a self-directed IRA platform that lets users transfer existing retirement assets to an approved IRA to purchase certain cryptocurrencies, including Bitcoin and Bitcoin Cash, Ethereum and Ethereum Classic, Ripple and Litecoin. The tokens are held by custodian Kingdom Trust and stored in a BitGo cold storage wallet that requires three security keys to gain access.
Chris Kline, chief operating officer of Bitcoin IRA, believes that cryptocurrencies are very similar to gold as a way to insulate portfolios from wider economic forces.
“There are some [investors] who are looking for yield,” he told ThinkAdvisor. “They’re at that point in their retirement where they need to start growing and accruing. Others are getting out of dollar-based assets for fear that [the] dilution and hyperinflation that’s happening in other places could strike here; a lot of the same parallels to gold buyers, but instead of a brick of gold that you store, it’s a cryptocurrency. Bitcoin in particular is [considered] Gold 2.0 because of the store value of it; it’s so limited and finite in its nature.”
Bitcoin supply is capped at 21 million BTC.
Kline said his customers include people who are experimenting with digital currencies and those who are doubling down on their growth potential.