Crypto Exchange vs. Crypto IRA: What's the difference? | Learn

Crypto has emerged as a new addition to the investment landscape. Offering a blend of innovation and potential for growth, these digital assets have captured the attention of investors worldwide.

For many looking to dive into crypto, their first stop is often a Crypto Exchange. These platforms are hubs for buying, selling, and trading a wide range of digital assets. However, recent events have cast a shadow over some exchanges, with issues arising from the misuse of customer funds for speculative ventures and business operations.

There are other methods of buying and selling cryptocurrency outside of an exchange. Certain platforms provide the option to buy and sell crypto within a retirement account like an IRA. This approach is known as a Crypto IRA.

We will be providing an overview of a Crypto Exchange vs. Crypto IRA, aiming to unpack the differences and benefits of these two investment pathways.

What is a Crypto Exchange

Crypto Exchanges are platforms that allow users to buy, sell, and trade a variety of cryptocurrencies.

Crypto Exchanges are similar to traditional stock exchanges, offering a more controlled environment where a central authority oversees transactions.

Challenges and Risks of Crypto Exchanges

While Crypto Exchanges provide an accessible platform for buying and selling digital assets, they are not without their challenges and risks. These concerns have become particularly prominent in light of events that have shaken investor confidence in these platforms.

On-Balance Sheet Practices: Crypto Exchanges practice an On-Balance Sheet approach. This means that the client's assets are recorded on the company’s financial statements and are directly tied to the financial health of the exchange. In such a setup, clients' assets may be leveraged in the company's speculative ventures. In 2022, incidents involving exchanges like FTX, BlockFi, and Voyager underscored the risks of this practice. These platforms used client funds in ways that led to bankruptcy, resulting in permanent loss of customer assets.
Security Risks: Security is a major concern for Crypto Exchanges. These platforms are often targeted by hackers, and cases of fraud and theft have been known to occur. Such incidents, like the one that occurred with the Mt.Gox exchange, could lead to significant financial losses for users.
Taxes: Another significant consideration for users of Crypto Exchanges is the potential tax liabilities. When you buy crypto on an exchange, you’re using post-tax dollars. If the value of the crypto asset goes up and you sell it, you'll be liable to pay capital gains tax on the profit. Many individuals investing in cryptocurrency often neglect a crucial aspect: the tax consequences. Unaware to many, the IRS, in 2019, introduced a significant update with the addition of a cryptocurrency-related question in Form 1040, Schedule 1, titled ”Additional Income and Adjustments to Income”.

We’ll illustrate an example:

Let's say you buy $30,000 worth of Bitcoin on an exchange. Over the next few years, the value of your Bitcoin holdings increases to $60,000. If you decide to sell your Bitcoin at this point, you'll have capital gains of $30,000 ($60,000 - $30,000). The specific tax liability from this gain would vary based on the duration of your Bitcoin holding and your tax circumstances.

As you can see, Crypto Exchanges come with bundled risks and challenges that require careful navigation and informed decision-making by investors. Because of these challenges, investors see the benefits of using a tax-advantaged retirement plan.

Introduction to IRAs

Individual Retirement Accounts (IRAs), specifically Traditional and Roth IRAs, are among the most popular and effective investment vehicles for retirement planning. They offer unique tax advantages that cater to a diverse range of financial situations and retirement goals. Traditional IRAs provide the benefit of tax-deferred growth, allowing contributions to potentially reduce current taxable income and offering the advantage of paying taxes on earnings at a potentially lower rate during retirement.

On the other hand, Roth IRAs, funded with after-tax dollars, offer tax-free growth and withdrawals in retirement, making them an attractive option for those who anticipate being in a higher tax bracket in the future. Both types of IRAs provide a flexible and powerful means to save and invest for retirement, making them essential tools in the financial planning toolkit.

What is a Crypto IRA?

A Crypto IRA is a type of retirement account that allows an investor to buy and sell cryptocurrencies, like Bitcoin and Ethereum, with the tax benefits of an IRA.

The Benefits of a Crypto IRA

Tax Advantages

Crypto IRAs provide significant tax benefits that you don’t get on a Crypto Exchange. In traditional IRAs, contributions might be tax-deductible, and the investments grow tax-deferred. With Roth IRAs, although contributions are made with after-tax dollars, the withdrawals are tax-free. This can be particularly beneficial for crypto investors, who could see appreciation over time.

We’ll illustrate the same example from above:

Again, you buy $30,000 worth of Bitcoin, this time within the Roth IRA using after-tax dollars, just like the non-IRA scenario. The value grows to $60,000 over the next few years. If you sell the Bitcoin within the Roth IRA, the $30,000 gain is not subject to capital gains tax. If you wait until you're at least 59.5 years old and the account has been open for at least five years, you can withdraw the money tax-free.

Remember if you have the same situation but in an exchange, you would have to pay capital gains taxes. This highlights the main advantage of buying and selling within an IRA - the tax benefits!

Off-Balance Sheet Asset Storage

Unlike traditional Crypto Exchanges, some Crypto IRA platforms ensure that user assets are stored off-balance sheet. This means that the assets are not commingled with the company’s operational funds, providing an added layer of security and trust.

What’s Your Choice?

The exploration of Crypto Exchanges and Crypto IRAs reveals distinct pathways for buying and selling cryptocurrency, each with its unique set of advantages and considerations.

Crypto Exchanges might seem like a direct route to the crypto market. However, they come with substantial risks, including security vulnerabilities, complex tax implications, and significant custodial concerns.

On the other hand, Crypto IRAs present a more secure and structured alternative, especially for those focused on long-term financial goals and retirement planning. They offer enhanced security measures, tax advantages, and a way to integrate cryptocurrency into a long-term investment strategy.

Crypto IRA Options

For those considering a Crypto IRA, iTrustCapital presents itself as a leading crypto IRA platform. iTrustCapital is a software platform that allows investors to buy and sell crypto within a tax-advantaged IRA*.

Benefits of iTrustCapital:

Tax Advantages: One of the most significant benefits of using iTrustCapital for your Crypto IRA is the tax efficiency it offers. Whether it's a traditional IRA with potential tax-deferred and tax-deductible benefits, or a Roth IRA with the possibility of tax-free withdrawals, iTrustCapital structures its services to maximize your investments.
Off-Balance Sheet Operation: A key feature of iTrustCapital is its commitment to off-balance sheet operations where assets are held in a regulated chartered trust. This ensures that client assets are segregated from the company's financials, offering a heightened level of security and peace of mind for investors.
24/7 Accessibility: Recognizing the need for constant access in the dynamic world of cryptocurrency, iTrustCapital provides 24/7 accessibility to its platform on desktop or mobile app. This feature is particularly beneficial in the crypto market, known for its volatility and frequent fluctuations.
Competitive Fee Structure: iTrustCapital is renowned for having some of the industry's lowest fees. Their fee structure is presented and written, allowing investors to understand the costs associated with their investments.

Want to learn why investors are choosing iTrustCapital to buy and sell crypto? Click below and read the article!

Top 5 reasons to open a Crypto IRA at iTrustCapital

Click here to open an account today!

DISCLAIMER

This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.

iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.

Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.

Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.

iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.