Invest in Ethereum in your IRA

  • While Ethereum is a cryptocurrency, it is not based on the blockchain technology that powers bitcoin.
  • Ethereum provides a platform for the development of decentralized applications (DApps). Ethereum is the original cryptocurrency.
  • It is the largest and most successful cryptocurrency, with a market cap of $18.8 billion. Ethereum's market capitalization surpassed bitcoin's in January 2018. Bitcoin is by far the largest cryptocurrency by market capitalization, but Ethereum is still the most valuable based on the total cryptocurrency market.
  • Ethereum can be used to exchange goods and services, but its primary use is as a store of value, similar to gold.

If you are not familiar with Ethereum, you are not alone. Although Ethereum is the leading cryptocurrency, it is still relatively obscure to many investors.
In this installment of our series on investing in cryptocurrencies, we'll explain the basics of Ethereum and determine whether it makes sense for your IRA.



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Account Types

You can invest in Ethereum in an IRA, however, there are a few account types to choose from.
Individual
A traditional IRA is a retirement account in which you make contributions and deduct them from your income. Traditional IRAs allow you to defer taxes on your earnings until you withdraw them.
Roth IRAs are funded with after-tax dollars. Contributions are not deductible, but qualified distributions, including earnings, are tax-free. Withdrawals made before age 59 1/2 are taxed as regular income.

Self-Directed
A self-directed IRA is an IRA in which you have direct control over the investment decisions. You are also allowed to open and maintain several IRAs for your retirement.

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Opening and Maintaining a Traditional IRA

The Internal Revenue Service (IRS) permits an IRA to be opened with virtually any type of investment, including cryptocurrency. However, the IRS prohibits the transfer of cryptocurrency from a regular account to an IRA account.
A traditional IRA can be established and funded with up to $6,000 annually. A Traditional IRA has certain favorable tax treatments that are unavailable to other types of IRAs, such as solo 401(k) plans and SEP IRAs. These advantages include:
Tax-deferred growth.

Tax-free distribution of earnings.

No required minimum distributions.

No pretax contributions.

Rollovers to a Traditional or Roth IRA

You can contribute up to $5,500 a year to a Traditional IRA or Roth IRA.
If you have income that triggers a "taxable event," such as a raise, promotion, or bonus, you can contribute up to $6,000 ($7,000 for those 50 or older).

You can contribute $6,000 a year to a Roth IRA or Roth 401(k) ($7,000 if 50 or older).

If you are 50 or older, you can contribute an extra $1,000 a year to your Traditional or Roth IRA.

If you earn less than $110,000 (single) or $220,000 (married filing jointly), you may qualify for a Saver's Credit.

You can contribute $1,000 a year to a Coverdell Education Savings Account (ESA).

ethereum in your ira

Tax Treatment of Your Ethereum IRA Investments

The tax treatment of Ethereum depends on your particular investment vehicle. Unfortunately, the IRS has not issued any guidelines specific to cryptocurrency IRAs specifically.
However, the IRS has issued guidance on using bitcoin in a tax-advantaged retirement account. In general, the IRS treats cryptocurrency the same as any other asset in a retirement account, including precious metals.
Gold and Silver IRAs
The IRS treats precious metals such as gold and silver as currency. Therefore, the gains you realize from holding gold and silver in a retirement account are taxed as capital gains. Your tax rate on gains depends on how long you've owned them.