# Guide to Investing in Cryptocurrency with an SDIRA

## Why Invest in Cryptocurrency?

Investors focused on growing their retirement portfolios with tax-advantaged accounts have often turned to traditional investment offerings like stocks, bonds, and mutual funds. But the alternative assets market provides investors with exciting opportunities to build a truly diversified portfolio.

Some alternative investments such as real estate, private equity, and precious metals are well-known cornerstones of the alternative investment market. Recent assets like cryptocurrency, however, offer investors opportunities to invest in an up-and-coming, trending asset class.

### What Is Crypto?

Cryptocurrency or "crypto," as it is commonly called is a decentralized currency that was created to provide an option for investing without relying on third parties such as banks and financial institutions. It also was designed to help eliminate a single point of failure in the market.

Virtual "coins" are created when transactions are verified or processed on decentralized computer networks. These networks are based on blockchain and cryptography, which makes crypto almost impossible to double spend or counterfeit.

You may have heard of a "cryptocurrency IRA," a "crypto IRA," a "bitcoin IRA," or a "crypto IRA account." All of these are simply names for a self-directed IRA that invests in cryptocurrency.

Although cryptocurrency has been around for over a decade, the relative newness and volatility of the asset means many investors are still learning what crypto is and how they can invest in it. While most people have heard of crypto, it is important to understand the ins and outs before investing.

In this guide we will explain how a self-directed IRA gives you the power to invest in cryptocurrency and other types of alternative investments with your retirement funds. We will also cover the pros and cons of investing in crypto with a self-directed IRA.

> "It's almost like the investment community just became so saturated with a lot of the same types of investments for so long that, little by little, there started to become this greater interest in what else is out there."
>
> — Allen Sukholitsky, Masterworks' Chief Investment Officer

### What are the Benefits of Investing in Cryptocurrencies?

The sudden growth of cryptocurrencies highlighted the potential of this new and exciting asset class for investors. Because it is based in technology, crypto has attracted people interested in the future of money. It has opened up the world of investing beyond the more well-known assets of real estate, precious metals, and stocks.

As a digital asset, crypto cannot be seized, and because it is decentralized, there's opportunity to grow wealth outside of the traditional market. Oftentimes, unlike private equity or real estate, which often require a significant amount of capital, investors can make a crypto investment for less than a dollar.

There are many reasons it can be beneficial to use your tax-advantaged SDIRA to grow your retirement portfolio with cryptocurrency.

## Types of Cryptocurrency

### Alt Coins

While Bitcoin is the most well-known, there are over 9,000 cryptocurrencies. Cryptocurrencies or tokens other than Bitcoin are generally called alternative cryptocurrencies or "alt coins." Ethereum is a well-known altcoin that has experienced great traction over the last several years. Each alt coin often has a unique characteristic. Some altcoins, like Litecoin, work to provide faster transactions.

### Fixed Supply

Some cryptos have a fixed supply, which means only a set number of coins will ever be available in the market. The maximum supply was designed to foster a supply and demand ecosystem in the hopes of creating value for the currency. Bitcoin, XRP, and Cardano are a few of the more popular fixed supply coins.

### Stablecoins

Like the US dollar, Bitcoin and other altcoins are not backed by physical assets. They are also not backed by the Federal Reserve. In recent years, however, the cryptocurrency world has expanded to include stablecoins. Stablecoins are cryptocurrencies that are backed by physical assets such as gold, precious metals, real estate, or even US dollars.

These coins have emerged in response to the volatile crypto market. By tying digital currencies to tangible assets, stable coins combine blockchain and digital technology with real-world commodities in an effort to provide a more "stable" crypto market. Stablecoins are subject to the same volatility as the asset that backs them. They are often non-interest bearing, and they can be used for payments because they are less likely to fluctuate wildly. Some examples of this type of coin include Tether, USD Coin, and Dai.

## Risks Related to Investing in Cryptocurrencies

Cryptocurrencies are known for being unpredictable. In their short lifetime, cryptocurrencies have gone through several large swings. Given the number of cryptocurrencies available, you might wonder if any cryptocurrencies have failed, and the answer is yes.

Over 2,000 cryptocurrencies have failed, which is almost 1/5th of the cryptocurrencies in circulation.

Cryptocurrency also has unique safety concerns that include hacking and potentially losing access to your crypto. Although crypto transactions are kept safe through cryptography, coins held on exchanges can still be hacked. If you hold your crypto in your own wallet, you can lose access if you lose your key phrase.

To learn more about the different types of wallets and crypto storage, check out our Get the Down Low on Crypto download.

## Taxes and Regulatory Environment

Because crypto was created as a decentralized currency, people sometimes wonder if it is a legal investment. The good news for investors is that in 2013, the U.S. Treasury Department's Financial Crimes Enforcement Network (FINCEN) confirmed crypto's legal status as both an investment and a form of payment if the seller is willing to accept it.

The SEC considers crypto to be a digital currency, while the Commodity Futures Trading Commission (CFTC) categorizes it as a commodity. And interestingly, the IRS treats cryptocurrency as property, which can dictate the way that it is taxed as an investment.

Although cryptocurrencies are digital, they are still currency and subject to tax. Beginning in 2019, the IRS began requiring cryptocurrency reporting. While some crypto exchanges may not provide tax reporting forms, investors still need to keep track of and report transactions.

Of course, one of the big advantages to investing in crypto with your SDIRA is that your gains can grow tax-free or tax-deferred.

### How Is Crypto Taxed?

Not all crypto is taxed the same. It is important to determine how you acquired the crypto when reporting it.

**Crypto that is earned**, such as payment for services, is taxed as income.

**Crypto that is purchased** as an investment and then traded is taxed as capital gains.

## Investing in Cryptocurrency with a Self-Directed Account

For many, either a traditional SDIRA or a Roth SDIRA can be an effective investment vehicle. If you are self-employed or a small business owner, you can also use an individual 401(k), SEP IRA, or SIMPLE IRA. Though these accounts differ in their structure and benefits, they have one fundamental commonality: they give you the power to invest your retirement funds when, where, and how you want.

Cryptocurrency investors need to be especially careful to do their due diligence. Make sure that you research any cryptocurrency you plan to invest in. Also, be on the lookout for potential fraud. Watch out for any investment that promises high returns or any investment account that skyrockets without cause. Be careful about wiring money and transferring crypto to anyone you do not know. It is important to be sure you are using a reputable crypto exchange to invest and vet any advisors thoroughly.

One final factor to keep in mind? Because crypto is an alternative asset and not available as an asset in most traditional brokerages, you must use an SDIRA administered by a specialized provider in order to invest.

Unsure which account is right for you? Read about the features and requirements of **[different self-directed accounts](https://www.theentrustgroup.com/self-directed-iras/self-directed-accounts)**.

### Entrust Makes it Easy to Invest in Crypto with an SDIRA

Investing in crypto with an SDIRA at Entrust is simple and straightforward. You select your assets, and you are responsible to do your due diligence. It is important that you learn the rules to avoid prohibited transactions in order to preserve the tax-advantaged status of your account. If you'd like an overview, check out our **[Prohibited Transaction Flowchart](https://www.theentrustgroup.com/hubfs/Prohibited_Transaction_Flowchart.pdf)**.

While Entrust cannot recommend investments or advise investors, we do provide self-directed account administration, recordkeeping services, and educational resources. We are also here to answer any questions you may have about the investment process or your self-directed IRA, but if you have any questions about the specifics of a particular investment, be sure to consult with your financial and legal counsel.

At Entrust you have three avenues to invest in cryptocurrency, outlined below.

### Option 1: Buy Cryptocurrency Through an Exchange

At Entrust, we have partnered with a cryptocurrency exchange, Cboe Digital.

### Option 2: Invest in Crypto-Based Assets

If you'd prefer to invest in cryptocurrency without holding crypto yourself, consider a digital currency fund or another crypto-based asset. This strategy allows you to invest in cryptocurrencies using an investment product structure you're already familiar with. Similar to a mutual fund, these allow you to invest in the stocks of companies that hold coins or have cryptocurrency-related services.

Investing in a digital currency fund or crypto-related company can give you an indirect way to invest in crypto and bypass the need for a wallet or keys.

As with any public or private funds, your SDIRA pays any associated fees. Keep in mind that there may be restrictions limiting your access and ability to sell your shares in the fund.

### Option 3: Buy Cryptocurrency via an IRA LLC

Another way to **[invest in cryptocurrency with an SDIRA is via an LLC](https://www.theentrustgroup.com/blog/self-directed-ira-llc)**. There are a number of benefits associated with this structure including potential liability protection and direct access to your retirement funds via **[checkbook control](https://www.theentrustgroup.com/investments/private-placements-llcs/checkbook-control)**. However, there is a cost to create and maintain an LLC.

With an LLC, your SDIRA can hold a private wallet or choose to have a wallet on any exchange platform. While each exchange only provides access to particular cryptocurrencies, this structure provides the most flexibility if you want to invest in a crypto that is not listed on Cboe Digital or another popular exchange.

### Why Choose Entrust to Grow your Retirement Portfolio with Crypto?

Entrust has an established 40-year history providing investors with access to alternative investments. Our mission is rooted in empowering investors to make their own investment choices, and we are excited to continue that legacy in the cryptocurrency space.

Whether you want to manage your own wallet, invest with an exchange, or invest in crypto-related companies and assets, Entrust is here to help you. Open an account today and start diversifying your retirement portfolio with cryptocurrency.

#### Questions?

Schedule a consultation **[with one of our experts](https://www.theentrustgroup.com/self-directed-ira-services-decision-lp)**.

**Ready to get started?**

**[Open an Account](https://www.theentrustgroup.com/open-a-self-directed-ira)**