As the cryptocurrency market matures, more governments throughout the world introduce legislation to tax proceeds from crypto-related activities, with traders often triggering taxable events that can lead to future complications.
Avoiding paying taxes is illegal, but there are legal ways to dodge triggering taxable events while hodling onto one’s cryptocurrency holdings: Roth IRAs. These are individual retirement accounts (IRAs) with a special type of tax-advantaged system.
Using IRAs to avoid triggering taxable events with cryptocurrency investments is a strategy that has been considered for some time, with North American mining and hosting firm Compass Mining offering a solution for BTC users to mine directly to their IRAs last year.
Before diving deeper, it’s important to point out that Roth IRAs are only available in the United States, although other countries often have their own form of tax-advantaged investment vehicles. Often, stocks with significant exposure to Bitcoin — such as MicroStrategy — have to be used as a proxy for some of these vehicles.
What are Roth IRAs?
A Roth IRA is a type of individual retirement account to which investors contribute after-tax earnings. What makes Roth IRAs stand out is that what investors place in these savings accounts can grow tax-free and be withdrawn without any other taxes being owed after they’re aged 59 ½, if the account has been open for at least five years.
Essentially, a Roth IRA considers that since taxes have been paid on the funds being contributed into the account, investors do not need to pay any further tax as long as they meet the specific conditions outlined above.
Roth IRAs can be funded in various ways beyond regular contributions, which have to be made in cash. Assets permitted into Roth IRA accounts include stocks, exchange-traded funds, money market funds, bonds, mutual funds and cryptocurrencies.
The Internal Revenue Service (IRS) does not allow for direct cryptocurrency contributions into these accounts, but these are various Bitcoin IRA solutions that are designed for investors to save…