How Does the IRS Treat Cryptocurrency Held in an IRA?

As cryptocurrency continues to gain traction among investors, many people are exploring how to include digital assets like Bitcoin and Ethereum in their retirement strategy. One common question is: How does the IRS treat cryptocurrency when it’s held inside an IRA?

Whether you’re already familiar with self-directed retirement plans or just starting to explore alternative options, it’s important to understand the tax treatment, compliance rules, and how to make sure this kind of investment aligns with your long-term goals.

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What You’ll Learn in This Article

• How the IRS classifies cryptocurrency in an IRA
• The tax benefits of holding crypto inside an IRA
• Key IRS compliance rules to be aware of
• Why it’s smart to consult your CPA or financial planner first

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How the IRS Classifies Cryptocurrency in an IRA

The IRS treats cryptocurrency as property, similar to real estate, not as actual currency. This means gains or losses on cryptocurrency are generally handled under capital asset rules.

When held inside an IRA, however, the typical IRA tax advantages apply. Depending on the type of IRA you have, your crypto can either grow tax-deferred or even tax-free:

• Traditional IRA: Your cryptocurrency investments grow tax-deferred. You pay ordinary income tax when you take distributions in retirement.
• Roth IRA: Your cryptocurrency grows tax-free, and qualified withdrawals in retirement come out completely tax-free, including any gains.

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Tax Benefits: No Taxable Events on Trades Within the IRA

Another big advantage is that buying, selling, or exchanging cryptocurrencies inside your IRA does not trigger a taxable event each time you trade. This is different from holding crypto in a personal account, where every sale or exchange generally results in a reportable capital gain or loss.

This means you can actively manage your portfolio within the IRA, returning profits to your IRA, or shifting between coins, without worrying about immediate tax consequences.

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Key IRS Compliance Rules

While the tax treatment can be very favorable, there are strict rules to follow:

• Avoid prohibited transactions: You cannot use your IRA-held crypto for personal purchases or hold your own private wallet keys. Doing so could disqualify your IRA and create immediate tax consequences.
• Custody requirements: The IRS requires IRA assets to be held by a qualified custodian or administrator. Your IRA must purchase the crypto directly (not you personally), and you can’t benefit personally outside of the retirement account. Violating these rules can lead to severe tax penalties.
• No UBIT on passive investments: Simply buying and selling cryptocurrency inside your IRA typically does not trigger unrelated business income tax (UBIT). However, if your IRA engages in activities like crypto mining, it could.

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Work With Your CPA or Financial Planner

Investing in cryptocurrency through a Self-Directed IRA can be a smart way to diversify your retirement savings. However, it’s not for everyone. Before moving forward, be sure to discuss your plans with your CPA or financial planner. They can help you evaluate whether adding crypto fits your risk tolerance, retirement timeline, and overall financial strategy.

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Ready to Explore Crypto for Your Retirement?

Mountain West IRA makes it easy to diversify your Self-Directed IRA with cryptocurrency and other alternative assets directly in your IRA, all while remaining IRS-compliant.
Get in touch to learn the proper way to purchase cryptocurrency in your IRA, no LLC required.

📞 Call us at 866-377-3311 or
📅 Schedule a free consultation today to get started!