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Pros and Cons Crypto IRAs
A crypto IRA is simply an IRA (tax-advantaged retirement savings account) that can hold Bitcoin and other cryptocurrencies in its portfolio. But what are the pros and cons of crypto IRAs?
Let us explore this in detail.
Including cryptocurrencies like Bitcoin and Ether in your IRA account can be an effective way to diversify your investment portfolio.
Cryptocurrencies might act as a hedge against inflation and the fall of the fiat currency.
The consensus among industry experts is that cryptocurrencies are here to stay. It will grow in popularity and adoption with time. Other than being used as an exchange of value, cryptocurrencies like Ether, Solana, and ADA act as fuel in Decentralized Applications (Dapps) and Decentralized Finance (DeFi).
These are called utility tokens or cryptocurrencies.
I think, as cryptocurrencies gain traction the key is to start allocating small portions of your entire investment portfolio in your IRA to utility cryptocurrencies and holding onto them for an extended period.
But please note that it is crucial to conduct thorough research before investing in cryptocurrencies. There are hundreds and thousands of cryptocurrencies in the market and getting into the trap of fraud is quite possible.
One of the most significant advantages of a crypto IRA is its tax benefits.
For tax purposes, IRS treats cryptocurrencies as property, and capital gains taxes are levied on them when you sell cryptocurrencies for a profit in a normal scenario.
However, investing in cryptocurrencies via your IRA account may offset the Capital Gains Tax.
When you buy them via the Roth option (Roth crypto IRA) and hold them up to 59.5 years of age, no Capital Gains taxes are levied on withdrawal.
Furthermore, traditional crypto IRAs, offer deductions in your annual taxable income. Also, taxes are only levied when you withdraw them after 59.5 years of age. At this stage, you probably will be in a lower income tax bracket and hence will be able to save more on taxes.
High potential returns:
If we do our proper research and invest for the long term, cryptocurrencies offer high potential returns.
At present, cryptocurrencies are still in their infancy and have yet to reach their full potential. Over the next 20 to 30 years, they may experience exponential growth and increase significantly in value.
In the past few years, we have seen major rallies in prices for cryptocurrencies.
Bitcoin itself witnessed a whopping increase from a mere $0.09 when it started to its ATH of around $68,000 in just a matter of 10 years.
But volatility also causes significant downsizing of your investment. We should also be wary of the significant losses that might impact your portfolio.
Generally speaking, cryptocurrencies that have real-world applications can be trusted to give heart-throbbing growth to your investments. Although volatility along the way is also almost certain.
We all know cryptocurrencies are volatile, which means that their values can fluctuate wildly in short periods.
This volatility could potentially lead to significant losses if you’re not prepared for it.
Lack of Regulation:
The very purpose of the creation of cryptocurrencies was to build a currency independent of centralized control from the Federal government.
Hence it makes sense that cryptocurrencies are not fully abode by Government regulations. But this lack of regulation is a double-edged sword.
Although regulations are slowly been laid for cryptocurrencies. But still, there is no single authority that defines the regulations around cryptocurrencies.
The Commodity Futures Trading Commission treats Bitcoin as a commodity whereas the IRS treats Bitcoin as a property for tax purposes.
The lack of central regulations lead to manipulations and crimes such as money laundering.
The lack of regulations also means that literally, no one is responsible for any fraud and losses.
For instance, the FDIC insures the money that you save in banks up to certain limits (mostly $250,000).
But a similar approach is missing in the cryptocurrency space. Recent bankruptcies in the crypto space like the FTX collapse, and Genesis bankruptcy, had given investors hard time.
Unlike traditional IRAs, self-directed IRAs (SDIRAs) have different fees and charges like one-time set-up fees, recurring maintenance fees, and trading charges (usually 1% to 2%).
These costs are often not clearly stated on the platforms, which can give you a bummer at a later stage. In addition, there may be hidden fees that are not commonly seen in traditional Roth IRAs.
Other risks: There are yet other risks like liquidity risks, and heightened risks of fraud, complex tax rules. Unknowing events can cause penalties and often the tax-deferred status of the IRA is lost.
Please note: The investing information provided on this page is for educational purposes only. BlockchainFundas does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.