Have the recent price fluctuations in the cryptocurrency market caused you to take notice? If so, you might have decided to put some of this alternative currency into an IRA but aren't sure how. Don't feel bad. Millions of working adults have the same kind of question, namely, "What's the best way to create a self-directed IRA and place cryptocurrency into it?"
For those who are serious about getting started, there are a couple of preliminary steps. First, you need to understand the basics of how self-directed IRAs work. Then, it's essential to know how to create an IRA that can hold crypto.
Finally, do enough research to feel comfortable about the positive and negative aspects of putting crypto into a SDIRA (self-directed IRA). You need to do these preliminary steps because cryptocurrency is a very new kind of asset compared to things like stocks and bonds.
What does the IRS say about cryptocurrency? Well, the government tax agency considers crypto to be property, not money. That is extremely important because property is taxed differently from cash or other kinds of cash-like assets.
Before delving into the nuts and bolts of how to set up a crypto-based SDIRA, let's first look at the recent history of price movements in the cryptocurrency market.
Price History of Cryptocurrency
There are no intermediaries between holders of cryptocurrency. That's because the entire network it's built upon, a decentralized exchange is 100 percent digital, is not "physical" in any sense of the word, and is not under the control of any of the world's governments or corporations.
Since 2009, when the first crypto arrived on the scene, thousands more have followed. Of all the successful ones, prices have generally risen by a substantial amount since then.
Once prices of the top three cryptos took off after 2015, millions of investors worldwide began to pay attention to what was, at first, considered an experimental form of money that might fail. There were lots of "crypto millionaires" during the middle of the last decade, which is the main thing that popularized the potential of cryptocurrency and caused most everyone to realize that, as an asset class, it was here to stay.
By the end of 2018, the leading alt-coins (another name for cryptocurrency) had settled down to a common price level, even though they were all about double or triple their values of the year before. Slowly, between early 2019 and early 2020, prices for most of the leading coins either held stable or rose considerably.
When the COVID-19 virus caused significant turmoil in the global economy, so many investors viewed cryptocurrency as a hedge against an economic catastrophe that prices rose again, but this time by a lot. After the middle of 2021 passed, and the pandemic hung around for the long run, crypto prices sank back down, but not as much as they had risen.
What does the rest of the decade hold, price-wise, for the alt-coin market? There's no precise way to predict the future, but it's worth noting that nearly every time cryptocurrency prices have risen, they tend to fall back to a higher holding point than the previous low. In other words, the overall price of alt-coins tends to be edging up, if history is any guide.
How Do Crypto SDIRAs Work?
Most people who have SDIRAs that include cryptocurrency enjoy having the diversification option, the chance to own an asset that can act as a hedge against inflation, and be protected from the potential downside of an economic meltdown.
During the COVID-19 crisis, alt-coins performed well, proving their value as a reputable asset class. Also, there is a historical precedent of crypto assets generally following a rising trend line concerning prices.
As time marches on, more and more consumers are using alt-coins as a means of exchange, which is a vital sign that crypto is here to stay. As a class, crypto outperformed both gold and the S&P 500 index throughout 2020, a crisis year by any definition.
What are the negative points of keeping cryptocurrency in a SDIRA? For starters, if you can't deal with risk, then crypto is probably not a wise way to go. The price volatility is for real and likely will continue for some time.
Second, there's the tax situation. When you pull money out of a crypto-based SDIRA, you will not pay ordinary income-tax rates but long-term capital gains rates. Plus, there can be more fees associated with crypto-based and traditional IRAs. Why?
Crypto is still a unique asset, and the custodian often has to find a willing seller for the alt-coin you wish to buy. There are additional security tasks to keep the crypto asset safe from hacking and special reporting for tax purposes.
SDIRAs: Essential Things To Know
The good news is that it's no harder to set up a crypto-based SDIRA than to start a regular, traditional retirement account. There are some differences concerning rules and such, but the process itself is not a challenge. Anyone can do it. If you choose to create your own alt-coin SDIRA, follow these steps:
Which Companies Are Best?
There are many companies out there but only a handful that are highly reviewed, have experience in crypto safety and security, and who have the overall reputation to make you feel comfortable investing with them.
You can read our top crypto IRA companies guide to learn more in-depth about these companies, what they specialize in, and who would be a good fit for you.
Here is a preview of the companies below.