Why does a Bitcoin Roth IRA provide zero benefit?

Let’s first breakdown the key difference between a traditional IRA and a Roth IRA. With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. A person who anticipates being in a higher tax bracket at age 60 is better off with a Roth IRA than a traditional IRA, since it will grow tax free and be withdrawable without taxes. The Roth IRA has an annual limit and income eligibility cap which is designed to benefit the middle class earners.

There are many factors to consider when weighing the pros and cons of a Traditional IRA versus a Roth IRA. When thinking about using these two vehicles for holding bitcoin, there is an additional consideration to take into account. This consideration is the consequences of bitcoin adoption in the US. The ultimate goal and utility for bitcoin is a global store of value and currency. As each country adopts bitcoin as legal tender, bitcoin becomes ubiquitous. We have already seen this in El Salvador and the Central African Republic. In the US, the presidential running contender Robert Kennedy has promised to back the US dollar with Bitcoin, which is one step before legal tender. I think most would agree that eventually bitcoin will be legal tender globally. This may take 10, 20, or 30 years, possibly longer, but eventually as history has shown fiat currencies don’t last.

Because bitcoin is currently classified as a commodity, it is subject to capital gains/losses when disposed of. Using bitcoin to purchase goods, is considered a disposition at the market price when used. This makes using bitcoin for payments in the US unpractical. When Bitcoin becomes legal tender, there will no longer be capital gains when disposing of bitcoin. Meaning, citizens don’t need to keep track of their tax lots, and dispositions. Therefore holding bitcoin in a Roth IRA provides no benefit, since when bitcoin becomes legal tender, there won’t be any capital gains taxes anyways, so why place it into a Roth IRA. Additionally, Roth IRA accounts have monthly maintenance fees, which would be for nothing, when bitcoin becomes legal tender.

On the other hand, storing bitcoin in a Traditional IRA would still provide a significant economic benefit when bitcoin becomes legal tender. Since annual contributions are pre-tax, a person’s purchasing power is greater, resulting in more purchased bitcoin today. When bitcoin becomes legal tender, it would presumably be used without paying taxes on it. There is an assumption here, and the government might also differentiate between actual bitcoin and bitcoin derivatives. We can’t say with certainty what will happen in 20 years from now, but we can infer based on our current laws and forecasting bitcoin adoption. Understanding this difference between a Traditional IRA and Roth IRA when determining which vehicle to use for bitcoin retirement, can translate into millions of dollars years from now. Therefore, it’s surely worthwhile to take this into consideration when sitting down with your financial advisor or crypto tax accountant.

Please bear in mind that digital assets are an emerging industry, with pending regulations. Consulting a crypto accountant, or a crypto tax accountant can greatly help you in deciding which retirement vehicle is best for you. There are likely many variables to consider, so best to speak with a professional who has your best interest in mind. Please don’t hesitate to reach out to OnChain Accounting, with any crypto tax, crypto bookkeeping, and blockchain accounting questions. We are always excited to dive into a new project and further our knowledge in this exciting and emergent industry.