Why You Shouldn't Buy Bitcoin In Your IRA
I did a recent guest submission on Advisor Perspectives about the dangers of owning Bitcoin in an investment account, rather than outright in a digital wallet.
Where you own your digital assets matters. In the industry, we call this “Asset Location”, and with a currency, it matters as much as anything. The takeaways are:
Fees suck:
Like most alternatives Wall Street offers, bitcoin access isn’t too good to be true, it’s too good to be cheap. With rampant industry fee compression, firms have found a new offering on which they can upcharge.
Taxes are Less Efficient:
Cryptocurrencies are treated as capital assets, subject to the same short- and long-term capital gain tax rates that apply to stocks. However, there are no wash-sale rules for crypto. When you sell a stock at a loss, you must wait 30 days to rebuy it if you want to realize that loss on your taxes. Not so with Crypto.
Price and Returns Volatility:
Bitcoin has had three 80% drops since 2012 and is in the middle of a 40% crash this year. Are you prepared to have that asset in your portfolio swaying the balance?
Unmasking the Anonymous:
By design, payments are virtually anonymous, have no transaction limits, and digital wallets are not linked to individuals. Transactions aren’t reported to the IRS by anyone except the taxpayer.
Now imagine securitizing that asset into a product with a record of shareholders, 1099 issuance, and ownership in investment accounts attached to Social Security numbers and identity verification.
Who Has Your Money?
Several bitcoin proponents envision a future where worthless dollar bills float through empty streets, and wheelbarrows full of cash are required to buy a banana. In this fantasy, bitcoin holders have the most valuable currency and use it to transact daily.
Now, imagine “owning” bitcoin in your portfolio; You’re stuck with transacting during market hours, T+2 settlement time, conversion back to dollars, ACH/check processing times, and a fresh 1099 awaiting next January every time you withdraw. Whether the apocalypse comes or not, the extra steps between you and your currency must be acknowledged.