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Debate: Do Cryptocurrencies Belong in Retirement Accounts?

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Bitcoin and other cryptocurrencies have become wildly popular investment options for a broad range of clients. While many only dabble in crypto investments, some financial service firms have begun offering virtual currency as investment options for self-directed IRAs.

Today, Bitcoin and other cryptocurrencies are taxed in the same manner as other types of property — meaning that from a tax perspective, it can generate capital gains tax consequences similar to those from the sale of stock and other common retirement account investments.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether Bitcoin and other cryptocurrencies belong in a retirement account investment lineup.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Bitcoin and other forms of virtual currency are here to stay. Ignoring that does a disservice to clients who may be interested in cryptocurrency investments. Cryptocurrency investments can add diversification to any retirement portfolio and give clients potentially valuable protection from an extreme market downturn like the one most of us experienced only a few years ago. I’m all for expanding the investment choices given to retirement investors.

Bloink: Cryptocurrency is an extremely risky and volatile investment. Yes, taxpayers should be free to make their own investment choices — if they have the funds to do so without jeopardizing their future financial stability. However, while diversification is an admirable goal, there are much less risky ways to go about it. Advisors should discourage clients from making substantial cryptocurrency investments with their limited retirement funds. 

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Byrnes: Clients make risky investment choices all the time — and should be free to gauge their own risk tolerance. For many middle-income clients, their limited retirement funds are their only way to profit from investment gains. Denying taxpayers the opportunity to share in the profits that can be generated by cryptocurrency investments unfairly benefits the wealthy at the expense of ordinary taxpayers who may not have sufficient non-retirement savings to participate in cryptocurrency investments. 

Bloink: Retirement advisors must be careful to tailor their advice to the specific client. In most cases, the advisor should be clear that retirement security is paramount — and that their 401(k), IRA and other retirement savings vehicles are given tax preferences in order to encourage clients to proactively secure their own retirement income. For all but the wealthiest investors, Bitcoin and other cryptocurrency investments are simply too volatile, even when considered over the long term.

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Byrnes: Many respected investment advisors believe that Bitcoin and other cryptocurrencies will only continue to grow in popularity over the long term. That makes the IRA an ideal vehicle for holding cryptocurrency on a tax-preferred basis. Not only can clients benefit from investment growth, but they’re often able to benefit from tax-preferred investment growth.

Bloink: Bottom line? Bitcoin is extremely volatile and, to date, hasn’t lived up to the hype. We can’t compare Bitcoin to other types of stock trading. The fees associated with most of these accounts would greatly reduce any investment gains that the client might see. Every cryptocurrency trade generates a fee. IRA custodians charge their own fees for establishing self-directed IRAs — and many are charging higher fees to participate in cryptocurrency investments given the security and custodial issues unique to the investment. Bitcoin is a retirement investment that should be reserved for the most wealthy and sophisticated investment clients.

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