Crypto Taxes for Retirement Accounts: In-Depth Guide
Crypto taxes for retirement accounts can be summarized into three categories – Every retirement account offers some tax perks. This includes reducing your yearly tax by contributions, growing investments without yearly taxes, and tax-free withdrawals at retirement. But obviously, you won’t get all three at the same time.
As cryptocurrency becomes more popular, more people are thinking about adding it to their retirement savings. This is reflected in Investopedia’s 2022 Financial Literacy Survey, where about one-third of investors under the age of 55 plan to depend on cryptocurrency for their retirement.
However, the same survey showed that over 40% of people find cryptocurrency too risky or confusing for retirement planning. While we can’t change the risk factor—crypto is indeed risky—we can help clear up some of the confusion. This guide aims to provide practical tips and insights to make understanding crypto as a retirement investment easier.
We’ll cover general tax laws for most crypto retirement accounts, but this guide will mainly use those in the US, Canada, and Australia as examples.
Understanding Crypto Retirement Accounts
Crypto retirement accounts let you add cryptocurrencies like Bitcoin and Ethereum to your retirement savings. Just to be clear, these aren’t special accounts only for crypto. They’re regular retirement accounts that let you hold different assets, including crypto. These accounts come with tax perks, like growing your investments tax-free or making tax-free withdrawals, depending on the account type and where you live.
Besides the tax benefits, people choose crypto retirement accounts for a couple of big reasons.
First, the potential for high returns—crypto has shown huge growth over the past few years. But remember, with high returns comes high risk due to its volatility.
Second, adding crypto to your retirement portfolio can help diversify your investments, spreading out risk. But this also means more management complexity and dealing with regulatory uncertainties, like changing tax laws and legal issues.
To hold crypto in a retirement account, you have to use special custodians or platforms that handle these assets. For example, in the US, companies like BitcoinIRA and BitIRA offer Crypto IRAs. In Australia, self-managed super funds (SMSFs) can hold crypto through compliant exchanges like Swyftx. In Canada, you can include crypto in your RRSPs or TFSAs via approved platforms.
Basics of Crypto Taxes
Crypto taxes can be tricky, but here are the basics you need to know. In most places, cryptocurrencies like Bitcoin and Ethereum are treated as property or assets, not money. This affects how they’re taxed.
When you sell, trade, or get rid of your crypto, you usually have to pay capital gains tax. This means if you sell your crypto for more than you paid for it, you have to report that profit as a capital gain. The tax rate depends on how long you’ve held the crypto. For example, in the US, the tax rates are higher if you hold it for less than a year than if you go without selling for more than a year.
If you earn crypto through mining, staking, or payments, it’s taxed as ordinary income. You have to report the value of the crypto when you receive it as part of your yearly income. Later, if you sell or trade that crypto and its value changes, you’ll pay capital gains tax on the difference.
Some crypto activities, like staking and yield farming, can be more complicated. Usually, the rewards from these activities are subject to income tax. However, these transactions can quickly get into the gray areas because of the underlying complexities of how they work.
While these are common trends in most places, some countries have notable exceptions in their tax laws. For example, in India, there’s a flat 30% tax on any crypto profit or income, and you can’t offset losses. In the Netherlands, you pay a 31% tax on presumed gains, even if you didn’t actually make a profit. On the other hand, crypto tax havens like Dubai have no taxes on crypto or any income, and Singapore has no capital gains tax on crypto, though income from crypto activities is taxable.
Check out our in-depth country-wise crypto tax guides to learn more about your local tax laws.
Crypto Taxes for Retirement Account in the US
The main types of retirement accounts in the US:
- 401(k): Work-based plans where employees can save money for retirement before taxes are taken out.
- IRA (Individual Retirement Account): Personal retirement savings with tax benefits, including Traditional IRAs (tax-deductible savings) and Roth IRAs (tax-free withdrawals).
- 403(b): Similar to 401(k) but for people working in public schools and certain non-profits.
- SEP IRA (Simplified Employee Pension): Retirement savings for self-employed and small business owners with high contribution limits.
- SIMPLE IRA (Savings Incentive Match Plan for Employees): Retirement plan for small businesses where both employers and employees can contribute.
- 457(b): Retirement plans for state and local government workers and some non-profits, similar to 401(k) plans.
Among these six main types of retirement accounts, only Traditional IRAs and Roth IRAs allow you to invest in crypto. Check out our in-depth guide on Crypto IRAs to learn more about how they work and the steps to set one up.
Taxes on Crypto IRA
The tax implications of crypto IRAs depend on the type of IRA you choose:
Traditional IRAs: The money you invest can be deducted from your taxes for that year. Your investments grow tax-free until you take the money out, at which point you pay regular income tax.
Roth IRAs: The money you invest is not tax-deductible. However, any withdrawals, including gains from crypto, are tax-free if you follow the rules.
Crypto Taxes for Retirement Account in Australia
In Australia, retirement accounts primarily include superannuation (super) funds, which are compulsory savings for retirement. There are also Self-Managed Super Funds (SMSFs), where people can control their own retirement money and what they invest in. So, SMSF is how you can add crypto to your retirement account in Australia. Other types are retail, industry, and public sector funds, each offering different investment options based on the type of job.
Taxes on Crypto SMSF
This is how crypto taxes for SMSF work – when you’re in the accumulation phase (adding money to your SMSF), any gains from your crypto are taxed at a low rate of 15%. If you hold the crypto for over a year, the tax rate drops to 10%. When you start taking money out in the retirement phase, the income can be tax-free if you choose an account-based pension.
But remember, running an SMSF isn’t easy. You need to follow strict rules and keep detailed records. You also must use an Australian crypto exchange and keep your SMSF account separate from your personal one. Plus, you must appoint an auditor to review your SMSF every year.
While the tax benefits are great, managing an SMSF can be tricky. It’s better to consult a professional. Check out our in-depth guide on Crypto SMSF to learn more about how it works and set one up.
Crypto Taxes for Retirement Account in Canada
In Canada, there are different retirement accounts:
- Registered Retirement Savings Plan (RRSP): Your money grows tax-free until you withdraw it.
- Tax-Free Savings Account (TFSA): You can take out money anytime without paying taxes on it.
- Canada Pension Plan (CPP): The government gives you a monthly income when you retire.
- Registered Pension Plan (RPP): A retirement savings plan provided by your employer.
- Deferred Profit Sharing Plan (DPSP): Your employer shares profits with you, and it’s saved for your retirement.
Unfortunately, none of the retirement accounts or schemes in Canada allow you to invest in crypto. But there is a workaround. RRSP and TFSA allow you to add ETFs. So, while you can’t directly invest in Bitcoin or other cryptocurrencies, you can profit from their price movements by adding crypto ETFs to these retirement accounts.
Taxes on Holding Crypto in RRSP or TFSA
Here’s how crypto taxes for RRSP and TFSA work:
RRSP (Registered Retirement Savings Plan): Contributions to an RRSP are tax-deductible, which means you can lower your taxable income. The money in your RRSP grows without being taxed until you withdraw it.
TFSA (Tax-Free Savings Account): In a TFSA, your investments grow tax-free, and you don’t pay any taxes when you take the money out. This makes TFSAs great for getting the most out of your investments.
Check out our in-depth guide on How to Hold Crypto in RRSP or TFSA to learn how they work and set them up.
General Tax Rules on Crypto Retirement Accounts
No matter where you live, if your country allows you to add crypto to your retirement accounts, they will follow the following common trends of tax treatments:
Tax-Deductible Contributions: These are schemes where you can reduce your yearly tax burden by subtracting the amount you contribute to your crypto retirement account. This is similar to how you can deduct any amount you donate to charity from taxes. Traditional IRAs in the US and RRSP in Canada are good examples.
Tax-Free Growth: This means you don’t pay taxes on your investments, including crypto until you withdraw the money. Accounts like Traditional IRAs and RRSPs work this way, letting your investments grow without yearly taxes. However, you’ll be liable to taxes at the time of withdrawal.
Tax-Free Withdrawal: These accounts allow you to contribute after-tax dollars (crypto, in this case). But then, your withdrawals, including any crypto gains, are tax-free. Examples include Roth IRA, SMSF, and TFSA.
Beyond the tax benefits, something else to keep in mind is staying compliant with rules. For example, in the US, the IRS requires all IRA investments, including crypto, to be held by a custodian.
Self-directed IRAs that include crypto have to follow strict guidelines to keep their tax benefits. In Australia, SMSFs must follow the sole purpose test, meaning all investments should aim to provide for retirement.
Breaking the rules, like doing prohibited transactions or going over contribution limits, can lead to big fines and loss of tax benefits. Knowing and following these rules helps you avoid issues.
Lastly, it’s best to talk to a tax professional who understands both crypto and retirement accounts. They can help you navigate the rules and make the best choices for your investments.
FAQ
Can you own crypto in a retirement account?
Yes, you can own crypto in a retirement account. Some retirement accounts, like self-directed IRAs in the US, allow you to invest in cryptocurrencies. This is true for similar retirement account schemes in other countries too. However, you need to use a custodian or platform that supports crypto investments to do this.
Is crypto a good investment for retirement?
Crypto can be a good investment for retirement, but it comes with risks. Cryptocurrencies have the potential for high returns, but they are also very volatile. This means their value can go up and down a lot. It’s important to do your research and consider how much risk you’re willing to take before adding crypto to your retirement portfolio.
What is the safest long-term crypto?
The safest long-term crypto is often considered to be Bitcoin. It’s the oldest and most well-known cryptocurrency with the largest market value. Ethereum is also seen as a strong long-term investment due to its wide use in smart contracts and decentralized applications. However, all cryptocurrencies carry risk, so it’s important to do your research and invest wisely.
Check out our guide on the best long-term crypto investment strategies to learn more.