Bitcoin IRAs: How are they taxed?

Bitcoin IRAs and crypto IRAs offer good tax benefits to US investors. They help you reduce your tax bill in the short-term and work as the ultimate hodling tool in the long-term. Let's find out how they work from a tax perspective.

A Bitcoin IRA, or indeed any crypto IRA, is a self-directed Individual Retirement Account (IRA). You can use Bitcoin IRAs and crypto IRAs to invest in cryptocurrencies as well as more traditional investment assets like property or stocks. Learn more about the best Bitcoin IRAs.

Bitcoin IRA Taxes

Bitcoin and crypto IRAs come with significant tax benefits. But you need to have a good understanding of crypto taxes and the different types of IRA accounts available to capitalize on these. So let’s break it down.

The IRS views crypto as property - this means in most instances it will be subject to Capital Gains Tax, like other properties such as stocks. When you sell, spend or trade crypto - you’ll normally pay Capital Gains Tax on any profit (capital gain). In addition to this, some crypto transactions - like mining or staking crypto - are subject to Income Tax.

But this isn’t the case when it comes to Bitcoin IRAs. The taxation on your Bitcoin IRA depends on the kind of crypto IRA you pick.

Traditional crypto IRA tax

Your contributions to a traditional crypto IRA are most often tax deductible. This means crypto held within your IRA isn't subject to Capital Gains Tax or Income Tax. Contributions to your traditional IRA are also tax deductible - up to a certain limit. So, you can reduce your tax bill by deducting traditional IRA contributions each year. You’ll pay no tax on your crypto in a Traditional IRA until you withdraw your funds - at which point you’ll pay Income Tax. Of course, as it’s at the age of retirement - you’ll likely pay a significantly lower Income Tax rate than you pay currently.

Roth crypto IRA tax

A Roth crypto IRA is a specific IRA product where you won’t pay any tax when you withdraw your funds at the point of retirement. Like the above, you'll pay no Capital Gains Tax or Income Tax on crypto held within a Roth IRA. However this comes with a caveat, crypto you invest into a Roth IRA is not tax deductible - so you can't reduce your tax bill each year by contributing to your Roth IRA.

Traditional crypto IRA vs Roth crypto IRA

There’s no right or wrong IRA to pick. It all depends on whether you want to take advantage of tax benefits now or enjoy tax free withdrawals in the future. Both types of IRA accounts have a maximum contribution limit of $6,000 a year ($7,000 if you’re aged 50+). Traditional IRAs are better suited for those who expect to be in the same or a lower tax bracket at the point of retirement, while Roth IRAs are better suited to individuals who expect to be in a higher tax bracket at the point of retirement.

Make crypto tax simple

If you’re not using a Bitcoin IRA - crypto tax can be complicated, but Koinly makes it simple by automating the entire process for you, letting you keep track of your IRA investments and potential tax liability.

All you need to do is sync the wallets and exchanges you use with Koinly using either API or by importing CSV files of your transaction history. Koinly will then calculate your capital gains, losses, any crypto income and expenses and calculate your crypto taxes for you. You can find a simple summary of your crypto taxes on the tax summary page, as well as download pre-filled crypto tax reports including IRS Form 8949 and Schedule D, the TurboTax report and the Tax Act report.