Broker Check

3 Things Pre-Retirees Must Know About Cryptocurrency Investments

July 22, 2022

3 Things Pre-Retirees Must Know About Cryptocurrency Investments

A good retirement investment portfolio should have diversity in asset classes in order to mitigate risk. One way many pre-retirees are diversifying their assets is by investing in cryptocurrencies. This year it was recorded that 31% of near retirees (between ages 55 and 64) were invested in crypto. If you’re considering investing in crypto to diversify your retirement portfolio, here are some things you should know.

Are cryptocurrencies a profitable investment?

Cryptocurrencies are highly volatile. Harvard University senior fellow Timothy Massad explains how compared to other asset classes, they are also not regulated by any federal authorities which is why there are unique risks attached to crypto. He noted that “investor protection is much, much weaker on these big exchanges than it is in our securities markets or our futures market.” This makes cryptocurrency a high-risk investment, especially for retirees who could lose a lot and not have the time to regain their lost assets. If investing in cryptocurrency is only a small part of your retirement portfolio and you have a long-term plan then the risk does decrease. Investing in crypto can be profitable, but retirees carry the added risk of a shorter reaction and recovery time.

How are cryptocurrencies taxed?

As the IRS classifies cryptocurrencies as property, transactions are taxable by law. These transactions involve any event where you make gains through selling, trading, or disposing of any cryptocurrencies. This is why buying crypto on its own is a taxable purchase. And if, for instance, you buy crypto at $2,000 and sell it later on for $3,000, then you’ll need to pay taxes on the profit of $1,000.

Because cryptocurrencies are taxed differently from other asset classes those who invest in them need to be very careful. Maryville University states that crypto taxes are never fixed, so retirees must make the effort to keep clear records so the taxes they paid are never questioned if audited. If you’re not confident with documenting your own record, get a professional accountant to bookkeep. Remember: failure to pay proper taxes could result in hefty penalties.

Which retirement accounts allow crypto investments?

Depending on the type of retirement account that you hold, you might not be able to include cryptocurrencies in your retirement investment portfolios. Many 401(k) accounts, which are opened through your employer, often work with pre-selected funds and might not consider cryptocurrencies as an asset you can invest in. You may be able to work around this, though, if you own a self-directed 401(k) account. The good news is that NPR reports that some 401(k) brokerages like Fidelity, however, have begun to welcome Bitcoin as an investment option.

If you have individual retirement accounts (IRAs), which you open, fund, and manage on your own, then it’s best to consult an advisor before making crypto investments. Most IRAs are managed by banks or broker-dealers, but self-directed IRAs allow you to control what’s in your account — including crypto if it’s allowed by the brokerage. Moreover, self-directed IRAs can help defer or eliminate capital gains taxes for regular crypto investments.

Cryptocurrencies can be a strong investment to include in your portfolio. They can also be risky, so a good rule of thumb should be that you only invest what you can afford to lose. With how volatile the crypto market it, it’s quite possible you could lose up to 50% of what you invest.  As long as you equip yourself with the necessary knowledge and practice care, then cryptocurrencies could be a great asset to explore.

Article written by Remy Judson
Exclusively for DuPont Wealth Solutions