Can You Own Crypto in Your Roth IRA?

Internal Revenue Service (IRS) rules mean that you cannot contribute cryptocurrency directly into your Roth individual retirement account (Roth IRA), but there appears to be no rule about adding crypto to your Roth IRA via purchase. However, few Roth IRAs providers allow you to do this. This has led to the emergence of “Bitcoin IRAs”—retirement accounts designed to let you invest in cryptocurrencies.

Just because you can hold crypto in your Roth IRA doesn’t mean that you should, though. Individuals may find that including Bitcoin or altcoin holdings may add diversification to retirement portfolios, but its price volatility could be unsuitable for somebody approaching retirement who cannot afford to ride out a downturn.

In this guide, we’ll look at the rules when it comes to adding crypto to your Roth IRA, and holding it there.

Can You Hold Crypto in a Roth IRA?

When Roth IRAs were invented back in 1997, crypto didn’t exist. Because of this, there is no specific mention of cryptocurrency in the part of the tax code that deals with Roth IRAs. However, the relevant regulations do define what kind of financial assets you can contribute to a Roth IRA, and what you can hold in one.

These rules mean that you can’t add cryptocurrency directly to your Roth IRA. That’s because Section 408(a)(1) requires that contributions to IRAs must be made in cash. And IRS Revenue Ruling 2019-4 makes it clear that cryptocurrency is not cash. Though “cash” is not defined in the regulations, it seemingly means United States currency in the form of dollar bills, coins, or a check.

However, you can add cryptocurrency to a Roth IRA by purchase. There are some rules barring Roth IRAs from holding “collectibles” and “coins,” but they don’t seem to apply to crypto. Because cryptocurrency is property, an IRA may acquire cryptocurrency by purchase without running afoul of rules prohibiting IRAs from holding collectibles or coins.

This means that since 2014, the IRS has considered Bitcoin and other cryptocurrencies in retirement accounts as property, so that coins are taxed in the same fashion as stocks and bonds. Thus, cryptocurrency held in a Roth IRA has income tax basis for purposes of measuring gain or loss upon occurrence of a taxable sale or exchange.

In principle, Roth IRA holders looking to include digital tokens in their retirement accounts only need to find a custodian willing to accept cryptocurrency. The problem: Few of the traditional providers of Roth IRAs are willing to allow you to hold cryptocurrency as part of them.

The Alternative: Bitcoin IRAs

Fortunately for individuals committed to including Bitcoin in their IRAs, self-directed IRAs (SDIRAs) more frequently allow for alternative assets like cryptocurrencies.

Recently, custodians and other companies designed to help investors include Bitcoin in their IRAs have become increasingly popular. Some of these companies include BitIRA, Equity Trust, and Bitcoin IRA, one of the early leaders in the field.

This doesn’t necessarily mean that holding crypto in your account is a good idea, though. Some argue that crypto can add further diversification to Roth IRAs, and others argue that cryptocurrencies (and the Roth IRAs that hold them) will continue to increase in popularity and price long into the future. On the other hand, crypto is characterized by extreme volatility, and this represents a huge risk for those investors approaching retirement who cannot wait out a downturn.

Also, you should be aware that fees for crypto IRAs are typically much higher than for traditional IRAs. For example, setting up a $50,000 SDIRA for trading can cost as much as $6,000 in charges during an initial setup, depending on the provider. There are also recurring custody and maintenance fees charged by providers of such services and fees associated with individual cryptocurrency trades. A typical provider may charge 3.5% per transaction for each purchase and 1% or a flat fee for each sale. Cumulatively, those fees could negate the tax advantages offered by IRAs.

The Bottom Line

Since 2014, the IRS has considered Bitcoin and other cryptocurrencies in retirement accounts as property. This means that you can’t contribute crypto to your Roth IRA directly, but you can add it to your IRA via purchase. The difficulty is that few traditional providers of IRAs will allow you to do this.

There are alternatives: crypto IRAs, which allow you to invest in crypto for your retirement accounts. Investors should carefully consider whether these accounts are suitable for retirement planning, given the high fees and the extreme volatility of cryptocurrency.