Cryptocurrency for Cannabis: A Booming Business Solution
At first glance, cannabis and crypto have nothing in common, but what can we discover with an in-depth analysis of these two concepts?
Is it possible for these industries to go hand in hand to achieve a common goal?
How can the world of cryptocurrency contribute to the development of cannabis legitimacy?
The Essence of Cryptocurrency
Crypto-money or cryptocurrency is a digital asset that does not resort to banks in order to conduct or verify financial transactions. It is a peer-to-peer solution that allows you to send and receive payments anonymously and without intermediaries.
All data is secure because it exists solely in a digital form within an online database that contains transaction-specific information.
Such digital records form a blockchain technology with advanced encryption, which is used to store and transfer digital currency data between wallets and from/to public registries. The main difference between blockchain and traditional banking lies in decentralization.
That is, there is no regulatory or organization monitoring the process. Besides, the information is not concentrated on servers in one place but distributed in a huge network of computers worldwide.
One of the most widely used cryptocurrencies (that needs no introduction) is bitcoin (BTC). Many investors see it as an opportunity to develop their capital by investing in BTC. As of November 2021, bitcoin holds a market capitalization of $1.274 billion.
5 Key Reasons to Benefit from Using Crypto
The ever-growing cryptocurrency industry offers new opportunities for all kinds of monetary transactions. It’s no secret that crypto operations feature a more significant number of benefits compared to traditional currency transactions and other financial assets. Some of the perks while performing any crypto operation include the following:
1. Low Transaction Fees
As mentioned above, transactions in cryptocurrency systems are carried out according to the P2P principle, excluding the involvement of a central supervisory authority. Therefore, reducing the costs of maintaining the network allows for a significant reduction in transfer fees.
Furthermore, unlike banking and electronic payment systems, users can set their fees and even send transactions without payment.
2. Fast Processing Speed and Irreversibility
Cryptocurrency tends to handle any transaction at high speed. In addition, once it is added to the blockchain, it becomes irreversible. The irreversibility of transactions prevents record forgery and fraud within the system.
3. Confidentiality and Reliable Data Protection
Privacy is definitely one of the key advantages of cryptocurrencies. You don't have to provide any personal information to access the system, which allows you to remain anonymous and keep your expenses out of the reach of the government, financial institutions, or marketing companies.
In addition, the money in any cryptocurrency wallet can only be accessed by providing a private, encrypted key that belongs only to the owner.
This means that no one can deduct coins from your account or suspend their movement.
4. An Easy Way to Invest and Build Capital
Cryptocurrencies can be a means of protecting your capital. For example, if a bank declares bankruptcy or the government fails to perform its duties diligently, the coins in a cryptocurrency wallet will become a financial insurance backup and help avoid typical banking problems.
5. Inflation-Proof
Cryptocurrencies implement a sophisticated method explicitly designed to prevent inflation.
Every cryptocurrency network has similar mechanisms, making it possible to predict how many coins will exist in a certain time and prevent it from devaluing in the financial market.
Legal Issues Behind Cryptocurrency and Cannabis
The cryptocurrency market is filled with different coins with a specific concept and purpose. Some are launched by commercial companies, while others are tied to a specific community/market.
For example, around 10 years ago, several types of cryptocurrencies were created specifically to become a means of payment for the marijuana trade around the world.
Nevertheless, the legal status of cryptocurrencies, including cannabis-based cryptocurrencies, remains unclear, largely due to the lack of full legalization at the banking level, making them untouchable to FDIC-affiliated institutions.
The emergence of cannabis "currency" has also been triggered by its uncertain status, with only 18 U.S. states authorizing recreational use of marijuana and 37 states approving medical marijuana.
With this in mind, many see a way to solve this problem by developing a specialized blockchain-based system for the cannabis market.
Such cannabis-inspired cryptocurrencies have taken their rightful place and grown in demand in the cryptocurrency market.
Additionally, many financial experts and cannabis community members predict that the crypto cannabis industry will take the place of major market players and become a gold mine as the legalization trend spreads.
5 High-Potential Cryptocurrencies for Cannabis
PotCoin (POT)
This currency was first introduced to the market in 2014. It is considered the pioneering crypto for cannabis businesses, which still leads the way today.
Thanks to its high-profile appearance, PotCoin attracted significant media attention and became a sensation in the crypto world.
The primary purpose of launching this type of cryptocurrency was to create a standard form of legal marijuana payment through a decentralized open-source cryptocurrency.
PotCoin was derived from a fork of Litecoin, and as a result, it completely replicates its technical operating principle.
DopeCoinGold
Like other cannabis cryptocurrencies, DopeCoin emerged because the industry was held back by unfavorable payment terms and the inability to introduce marijuana purchase and sale transactions into banking systems.
But since no real and promising solutions were found, DopeCoin, later rebranded as DopeCoinGold, came into play in 2014. Nowadays, you can buy this cryptocurrency on regulated currency exchanges, such as Bittrex, CoinBase, Binance, Etoro, etc.
CannabisCoin (CANN)
CANN is also a well-known cryptocurrency that has been around for more than five years – it came into existence just a few months later than POT.
Conceptually, CannabisCoin is similar to the first cryptocurrency on our list since it was also designed to facilitate payments between legal marijuana dispensaries.
In addition, CannabisCoin enables its owner to exchange a certain number of coins for licensed products manufactured with the plant, such as cosmetics, CBD oils, hemp oils, etc.
HempCoin (THC)
HempCoin (THC) is designed not only for marijuana distribution but also for the general agricultural industry. Thus, HempCoin primarily aims to facilitate the wholesale purchase of agricultural products. Today, the project has gained popularity.
The company introduced HempPay, a reliable crypto payment platform for legal cannabis purchases – with an app, a website, and a cryptocurrency credit card.
Tokes (TKS)
Tokes' operating principle focuses on performing transactions approved by U.S. laws. With a market cap of $3.51 million and legal status, TKS is considered a profitable investment option.
This crypto seeks to streamline business and reduce costs and comply with U.S. Financial Industry Regulatory Authority (FINRA) regulations. Therefore, this is an easy-to-use solution that addresses the specific payment needs of the industry.
Cryptocurrency Market Prospects for the Cannabis Industry
The cannabis market is one of the resilient sectors in North America. As a result, the outlook for cannabis companies is promising.
Despite the ongoing pandemic and constant litigation, the cannabis-based cryptocurrency is a solid investment tool.
From large-scale mergers to regulatory speculation, plenty of signals suggest that interest in cannabis-based cryptocurrencies will persist and grow in 2022.
Top 7 Bitcoin ETFs and Crypto Funds in 2022
Bitcoin and cryptocurrency have once again made their way into headlines with the latest buzz surrounding the launch of the first bitcoin-linked exchange-traded fund on October 19, 2021.
Cryptocurrency investors looking to take advantage of bitcoin exchange-traded funds (ETFs) were excited to witness the debut of ProShares, the first bitcoin ETF to hit the US market.
This followed the Securities and Exchange Commission’s (SEC) approval of the Volt Crypto Industry Revolution and Tech ETF, providing investors access to companies with huge exposure to Bitcoin.
Though other funds are expected to follow suit in the next few weeks, the road to launching the first bitcoin ETFs wasn’t an easy one. This is mainly because the cryptocurrency market is generally new, largely untested, and volatile, resulting in the SEC’s hesitancy in releasing it to the public.
What is an ETF?
An ETF is an investment channel that allows the performance tracking of assets, whether individual or in a group. This allows investors looking to focus only on gains and losses to access a simpler alternative to buying and selling individual assets as you would with regular stocks.
The Securities and Exchange Commission has received a number of proposals to sell bitcoin ETFs to investors. Experts are estimating that more bitcoin ETFs and crypto funds will be approved in 2022, making it a year to look into these investments. We’ll cover some of the top bitcoin ETFs and crypto funds that are set to make an appearance in the next year.
7 Best Bitcoin ETFs and Crypto Funds in 2022
1. Grayscale Bitcoin Trust (GBTC)
GBTC is not yet an ETF, but neither is it a mutual fund. It’s categorized as a “closed-end grantor trust.” What does this mean? It means it’s an investment channel that holds bitcoins that are mined and transmitted through the peer-to-peer Bitcoin network. This also allows investors to trade those shares in over the counter market.
The price of GBTC shares aim to mimic the price of Bitcoin available on the CoinDesk Bitcoin Price Index. Investors interested in GBTC can buy shares just like you would any normal stocks or shares.
It’s also helpful to note that Grayscale Investments currently manages more than $38 billion in digital currency assets, making it a reliable investment option. Some investors might find the management fee of 2% considerably high compared to mutual funds or other ETFs.
Though GBTC is not a bitcoin ETF yet, it most likely will be converted into an ETF in 2022, making it one of the best bitcoin ETFs to keep an eye on.
2. ProShares Bitcoin Strategy ETF (BITO)
BITO is the first U.S bitcoin-linked ETF launched on October 19, 2021 which aims to expose potential investors to bitcoin futures. It provides investors a unique opportunity to build up their bitcoin returns in a convenient, and more importantly, a transparent way through bitcoin futures contracts.
One important thing to note about BITO is that it does not directly invest in Bitcoin but in cash-settled, front-month bitcoin futures instead. These are contracts with the shortest time to maturity. This also means that the price and performance of bitcoin futures can be different than the current price of bitcoin.
3. Amplify Transformational Data Sharing ETF (BLOK)
BLOK is like many U.S. cryptocurrency ETFs that are usually invested in equities but provides a little more direct exposure to bitcoins. This is because BLOK invests in what’s known as Purpose Bitcoin ETF and the 3iQ CoinShares Bitcoin ETF – two of which are Canadian ETFs in Canadian dollars, while the other is in U.S. dollars.
It is also an actively managed ETF that aims to provide returns with investments from companies that are actively involved in blockchain technologies’ utilization and development.
BLOK’s top three allocations in the blockchain industry are divided into venture capital, crypto miners, and the last being exposure, which represents the three ETFs mentioned above.
BLOK is sponsored by Amplify Investments, a company that believes ETFs empower investors and can cast a wider net of investment opportunities.
4. Bitwise Crypto Industry Innovators ETF (BITQ)
BITQ is another cryptocurrency ETF that is focused on equity. It currently tracks the performance of an index created by Bitwise Index Services LLC, known as the Bitwise Crypto Innovators 30 Index.
Experts will agree that buying into this ETF will give you certain benefits no other ETFs will. Some of these benefits include:
- Exposure to the crypto market without having to directly own the crypto assets
- Exposure to companies currently developing the crypto infrastructure, including miners and platforms
- Access to a piece of global cryptocurrency players
One of the other major benefits of BITQ is that, while it carries the same stocks as other crypto funds, its top 10 holdings account for 64% of its assets. If you are completely confident in the rise of Bitcoin and cryptocurrencies, BITQ may be a good option to invest in next year.
5. Bitcoin Strategy ProFund Investor (BTCFX)
In case you missed it, Bitcoin futures mutual fund was launched in late July 2021, just a few months before the launch of BITO.
Known as the Bitcoin Strategy ProFund Investor (BTCFX), this first publicly available Bitcoin futures mutual fund aims to eliminate the need to manage your bitcoin exposure separately through exchanges or wallets.
It’s also designed to provide investment results by investing in Bitcoin futures contracts or through Canadian ETFs that invest in Bitcoin. The fund features a $1,000 minimum initial purchase. If you’re looking for a way to gain returns similar to an investment in Bitcoin without actually investing in Bitcoin, this may be the option for you. BTCFX paves the way for you to gain exposure to bitcoin without the need to do all the heavy lifting that comes with investing in it.
6. First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
CRPT is a fairly new ETF that is looking to invest in companies that are driving innovation in the digital economy and cryptocurrency world. According to a statement on its website, CRPT plans to invest at least 80% of its net assets into these companies.
CRPT is similar to other bitcoin ETFs in that it has a portfolio of 30 holdings with 10 of the top holdings accounting for 60% of its assets. These include top names like Coinbase and Marathon Digital.
7. VanEck Digital Transformation ETF (DAPP)
The DAPP is a newer cryptocurrency ETF that invests in companies that are in the loop of the digital asset economy. Just like BITQ, the DAPP is a smaller, more focused ETF with 25 holdings. The top 10 of its holdings account for 64% of its total assets.
DAPP is a small portfolio with three-quarters of it invested in technology stocks and the rest in financials. Don’t let the small portfolio fool you, as it’s one of the most diversified amongst other stocks.
What’s Next?
The approval of Volt Crypto Industry Revolution and ProShares are indications that regulators are warming up to the idea of cryptocurrency ETFs. Although there have been delays with more than a dozen more bitcoin ETFs waiting for approval including VanEck and Global X, analysts are foreseeing that most of these approvals will happen in 2022.
It’s expected that once SEC begins approving Bitcoin ETF, there’s going to be cutthroat competition with a mix of fintech companies, investment firms, and existing ETF issuers all fighting for a place in the bitcoin and cryptocurrency market. This may impact fees and market data distribution, so it’s best to speak to your fund manager or finance professional while awaiting the approvals of more bitcoin ETFs and crypto funds in 2022.
Is Investing Retirement Funds into Cryptocurrencies Risky or Smart?
If there’s one thing that’s consistently said about cryptocurrency investments, it’s that it’s extremely volatile and comes with its risks.
But investing in cryptocurrency can potentially offer you higher returns and diversify your retirement portfolio. Before jumping into it, it’s important to understand that to invest your retirement funds into cryptocurrencies, you’ll first have to set up a self-directed individual retirement account that allows you to invest in alternative assets.
This is because most, though not all, traditional financial institutions do not allow IRAs to invest in alternative assets, mainly because they earn their fees through traditional investments. We’ll explain a little more about this in the article.
But don’t worry too much about the red tape or limitations. According to the Retirement Industry Trust Association (RITA), approximately 2-5% of IRAs are invested in alternative assets. So, you won’t be the only one. The question is, should you invest your retirement funds into cryptocurrencies? Is it a smart or risky decision?
We’ll explain what it means to invest your retirement funds into crypto and some of the things you should know before making that decision.
Is It Too Late to Get into Cryptocurrency?
While the terms cryptocurrency and digital currency have been floating around the fintech atmosphere for a few years now, the asset is still considered to be in its infancy stage. Is there a potential for crypto to grow even bigger in the next few years? Definitely.
Generally, it’s not too late to get into cryptocurrency, depending on the type of currency you choose to invest in. For example, some may say it’s too late to invest in Bitcoin now since it was first introduced in 2009 and has been popularized so much that it drove the price up. While that may be the case, the cryptocurrency market fluctuates so much that the price of Bitcoin has seen its highs and lows. This means it’s not too late to get into cryptocurrency, you’ll just want to watch the price before you make the jump.
No one can really guarantee the rise or fall of crypto in the years to come as it’s still a very new market that isn’t properly regulated. There are now thousands of different cryptocurrencies in the market, showing the genuine growth potential of the asset. The benefits, returns, and excitement overshadow some of the traditional investments most IRAs prefer, like real estate or stock investments.
So, if you’re thinking about investing in cryptocurrency, don’t worry about being late to the party. Some may say it’s too late now, but they’ll be saying the same thing in 2030.
Are There Tax Advantages with Cryptocurrency Investments?
Cryptocurrency taxes can be a headache. You technically owe taxes each time you sell cryptocurrency at a profit, and it can be a bookkeeping nightmare to stay on top of all purchase prices and gains. Though there are some advantages with cryptocurrency investments because the asset is treated as property.
IRAs in general already receive preferential treatment when it comes to taxes. These advantages can sometimes apply to your cryptocurrency investment, provided you wait until you are of retirement age.
For example, your cryptocurrency tax bill will largely depend on your overall annual income, and how long you have had the crypto asset. If you’ve had Bitcoin or Ethereum for a year or less, these profits are usually considered short-term capital gains and can be taxed at your regular income tax rate.
However, if you have received profits from your cryptocurrency investment which you’ve held on for more than a year, these are considered long-term capital gains which are generally taxed at a lower rate than most income taxes.
How Much Should I Diversify My Portfolio with Bitcoin?
It’s good to know that cryptocurrency is still considered a volatile and risky investment option that’s hard to predict and monitor. One example of this is when Bitcoin fell below $30,000, along with other cryptocurrencies back in June 2021.
Despite the risks, experts are still saying you should diversify your portfolio and consider expanding your investments into cryptocurrency. But how much should you diversify?
Diversifying your portfolio with crypto will depend on how interested and aware you are of the market. Cryptocurrency investors are divided into two main groups — crypto-savvy and crypto-curious. Experts advise those who fall into the crypto-savvy space to diversify up to 4% of their portfolio.
However, those who are crypto-curious can choose to diversify 1% of their portfolio as a form of exploration before taking a deep dive. You can always add to your diversification as you learn more about the market and currency.
With that being said, most experts prefer to err on the side of caution and advise against diversifying anything more than 5% of your portfolio into cryptocurrency.
As with any investments, it’s important to do your research, understand the risks and market trends, and be financially capable before making your decision.
Will Cryptocurrency Be a Good Investment in 2022?
There’s an expectancy that there will be approximately one billion global Bitcoin wallets in 2025. This contributes to the speculation that cryptocurrencies are not just here to stay, but will continue growing in the next few years.
Bitcoin has enjoyed steady growth for the last couple of years, but other currencies are emerging to potentially be better investment options than Bitcoin. For example, Ethereum has been seeing a faster adoption rate than Bitcoin since 2019.
Though this market is considered risky, it has attracted a large number of users and investors. Deciding if cryptocurrency will be a good investment in 2022 will depend on your financial capabilities, interest, and portfolio.
If you’re looking to diversify your investment portfolio with something other than traditional investments, it may be a good idea to look into cryptocurrency investments. Deciding which currency to invest in will be your next thing to consider.
Can You Hold Crypto in an IRA?
As we have mentioned, the primary, and possibly only logical way to hold cryptocurrency in an IRA is for it to be a self-directed Individual Retirement Account. While you may be able to hold cryptocurrencies in your Roth IRA or 401(k) plans, most of these options are not very friendly to alternative assets like crypto or gold.
If you don’t already have a self-directed IRA, you can transfer capital from your current retirement account to an account set up by a self-directed IRA custodian.
Optionally, you can invest with Bitcoin IRA which launched back in May 2016. The company offers investors the tax advantages of an IRA coupled with the return of a high-risk, high-reward alternative asset class. This is just like other IRAs but instead of being funded by gold, cash, or bond, it’s funded by Bitcoin.
Bitcoin IRA doesn’t just deal with Bitcoin. It also includes a long list of other cryptocurrencies including Ethereum and Litecoin.
Economic uncertainties, especially in view of the pandemic and how the market will react to it, should come into play when you’re considering investing your retirement into cryptocurrency. Though it’s not too late to get into the game, the cryptocurrency market is still considered highly volatile and will continue to be so for several years.
As with any investments, if you are financially capable and have done your research, investing your retirement funds into cryptocurrency might not be a bad idea.
Crypto Vs Stocks: What’s Best Moving Forward?
The explosion of both cryptocurrency and stock investing has sparked debates amongst new and seasoned investors.
The stock market has been around in one form or another for centuries and has been the investment choice for most. While cryptocurrency has also been around for several years, it has recently gained popularity leading to its drastic growth.
Both options come with its drawback and benefits. Choosing which to invest in depends on more than what’s popular in the market. Rather, it’ll depend on your current portfolio, investment preferences, and financial capabilities.
In this article, we’ll take a look at the different aspects of both markets and what we can aspect from these investments.
Accessibility
To invest and trade in the stock market, you need to open a brokerage account or get in touch with a stockbroker. This requires having some knowledge about the stock market and fees.
While the stock market’s introduction to the online world has made it more accessible to the public, it still comes with the perception of being heavily regulated with high financial commitments. Although this may be a plus point for some investors by providing safety and ownership, it can be a deterrent for others that don’t understand the market.
The learning curve for traditional stock is also steeper compared to cryptocurrency. Despite the plethora of information about the stock market and beginner guides, it still requires consistent learning and research. Those who lack the time for extensive research can choose to hire an advisor, which is advisable but can be costly.
Cryptocurrencies, on the other hand, comes with a lot of basic level information that’s easier to understand. There’s also a perception that it’s much easier and cheaper to trade cryptocurrencies than it is with stocks. A study found that cryptocurrency appealed more to women and the underrepresented groups for these very reasons.
The growing popularity and cost of cryptocurrencies will continue well after 2022. As corporations and countries begin to accept and regulate digital currency, it’s important to continue watching the market to understand which currency will be popular in 2022.
Risks
There are potential risks in every form of investment. This is especially so with volatility in the market and the current economic state.
The stock market has had a long history of existence, which allows investors and speculators to use historical information to make investment decisions. This minimizes potential risks as there is guidance to refer to for an understanding of where the price might be heading towards. You can account for elements like the ratio of the company’s stock price, to the company’s current financial health to make an informed decision.
There are different risks to consider in traditional stock, which will depend on the stock’s sector. While Wallstreet is expecting the stock market to peak in 2022, some economists are cautious about the expectations taking into consideration the uncertainty of the pandemic and its recovery course.
Although cryptocurrency has gained a reputation for being volatile with sudden drastic changes to its value in the past, the pandemic has shown that it can withstand major economic shifts. By the end of 2020, the world’s best-known cryptocurrency, Bitcoin rose more than 4%. Investors saw Bitcoin as an alternative currency, especially with major companies embracing cryptocurrency as a potential mainstream payment method.
Amidst the different speculations for the traditional stock market, the news is abuzz with the prediction that Bitcoin will continue to grow. Bloomberg predicts Bitcoin will hit an all-time high price of $400,000 by the end of 2021, which will kick off 2022 on a good note for bitcoin investors.
Deciding which currency to invest in will also play a role in the amount of risk involved for the future.
While there are risks involved in an unregulated trade, it seems investors are viewing cryptocurrency as a growth asset that can potentially perform stronger than traditional stocks.
Tax Losses
Having the market value of your investment drop to less than what you’ve initially invested in can be to your benefit. You can sell those investments to harvest your tax losses.
Tax losses are great because they can reduce your overall tax bill. You can use these savings to reinvest or diversify your portfolio. It goes without saying that the more frequently you are allowed to harvest tax losses, the more savings you’ll be able to generate.
Although the stock market allows you to harvest tax losses, it comes with restrictions and limits. You’re only allowed to harvest your tax losses a certain number of times because stocks are considered property and are subjected to the wash sale rule. This may have been beneficial prior to 2020 but could pose a problem in the present and future considering the volatility of the market.
This rule prohibits you from claiming losses on stocks that are sold at a loss and then repurchased within 30 days before or after the initial disposal.
The benefit of tax losses has shifted more towards cryptocurrencies. Certain types of cryptocurrencies, like Bitcoin, allows you to harvest your tax losses more frequently. Mainly because Bitcoin is not treated as a property, and therefore, not subjected to the wash sale rule.
Diversification
Many investment websites will advise you to build a diversified portfolio that should ideally be able to withstand and perform in different markets and economic states.
While stocks have been known to perform well in relation to the broader economy, they can be heavily impacted by factors like inflation and recession.
The pandemic is an example of this where the FTSE, Dow Jones Industrial Average, and the Nikkei fell in the first few months of the pandemic. Although the market is recovering slowly, the possibility of new variants and further lockdowns may trigger more volatility in the market.
Having a diverse portfolio would have been handy and smart during a time like this.
Cryptocurrencies like Bitcoin and Altcoin are known to provide that diversification. Considering how well cryptocurrency has fared during the pandemic, it’s a logical alternative to some of the more common assets.
Cryptocurrency exchanges allow you to use your Bitcoin to purchase other currencies such as altcoins. This gives you the freedom to decide what you want to invest in and how you’d like to diversify your portfolio.
Regulation
Stocks are regulated by national agencies such as the Securities and Exchanges Commission (SEC) in the US or The United Kingdom Financial Conduct Authority. These agencies regulate and oversee stocks and stock markets to ensure transparency is a practice by publicly traded companies.
Being regulated by a government body may provide some comfort and security that fraud will be kept at a minimum. It’s a safety net for investors to ensure they’re not investing in unregulated stocks.
Cryptocurrencies, however, are still largely unregulated.
Cryptocurrencies are operated by decentralized networks with individuals that are focusing on maintaining their technology and maintaining the integrity of the currency. This may be a preference to some investors who aren’t so keen on government regulation and prefer to operate on an independent basis.
President Joe Biden’s budget proposal for 2022 includes cryptocurrency reporting requirements. If the proposal goes through, it will be the first step to regulating cryptocurrencies in the US.
Some countries including Singapore and Mexico have already set up laws and regulations surrounding the use and trade of cryptocurrencies and blockchain.
Uncertainty in the pandemic and how the market will react to it, especially with the new variant is something investors will be concerned about. Stock growth hasn’t been as dramatic as cryptocurrency, but it’s seen better days following the pandemic.
Both markets will continue growing with cryptocurrency expecting to be bullish by the end of 2021, bleeding into 2022.
It’s important to do your research no matter which option you choose. You should research the stock’s financials and find out which digital currency is suits you better before making your decision.
How to Use Your SDIRA to Invest in Real Estate During a Hot Market
If you already have a self-directed individual retirement account (SDIRA) and are looking to expand your investment portfolio, you might be wondering how to use it when investing in real estate.
Many wealthy people use SDIRA accounts as a tax break to increase wealth by investing in non-traditional investments. An SDIRA is an account that holds several types of alternative investments. This may include investments in cryptocurrency, precious metals, forex accounts, and real estate.
These investments can be prohibited from regular IRAs. An SDIRA account is administered by a custodian, sometimes known as a trustee, with the account holder making the investment decisions.
Real estate investment is considered an ideal investment as the value of properties tends to rise over time. If you are an active investor, you should consider either investing in rental real estate or flipping properties to diversify your investment portfolio with your SDIRA.
As long as you follow the IRS rules governing retirement plans, you'll be able to generate income with the real estate investment.
You can do this by understanding how SDIRAs work and how to use them to purchase real estate for investment purposes. Here are the rules and how you can get started.
Can I Purchase Property from My Self-Directed IRA?
Yes, but there are certain SDIRA rules to follow.
The first thing you'll need to have is a trusted custodian to handle all the back-end work. This may include the purchasing transaction, any relevant paperwork, and financial reporting. Having a custodian will help keep you from violating any rules about using your SDIRA to purchase a property.
It's also important to remember that purchasing real estate through your SDIRA might require cash payment depending on the property's value. You will also have to consider any custodian fees you may incur throughout the process.
Here are the rules you'll have to follow:
1. You Cannot Purchase a Property Currently Owned A Disqualified Person
You cannot purchase a property from any "disqualified person." This includes yourself, any immediate family members, your beneficiary or fiduciary, or any entity that owns over 50% of the property.
The real estate you purchase must only be an investment. You won't be allowed to use it for personal use, such as a vacation or a second family home.
2. You Cannot Have Indirect Benefits
In other words, any profit earned from the property must be for your retirement purposes. It cannot be for any indirect benefits, including living in the property, allowing your family members to live in the property, or using it for means other than an investment.
3. The Property Cannot Be Under Your Name
It's important to understand that you and your IRA are separate, meaning the title to the property will have to be in the name of your custodian, not yours.
4. Any Expenses from Property Must Be Paid from IRA
The IRA must fund the expenses incurred while or after purchasing the property. These expenses can include utility bills, maintenance fees, or any renovation costs.
5. Any Income Generated Must Return to IRA
As we've mentioned, any income generated from the real estate must be used for your retirement. This means you have to ensure the income generated from this real estate is returned to your IRA.
How Do I Purchase Real Estate with a Self-Directed IRA?
Using your self-directed IRA to purchase real estate can be very confusing. There's paperwork and rules to adhere to, which can be overwhelming if you're not familiar with the process. If you're not sure how to begin, we've listed a few steps.
1. Choose A Specialized Self-Directed IRA Custodian
Custodians or trustees that manage regular IRAs may be able to help you, but it's advisable to find a specialized self-directed IRA custodian for this purpose. Self-directed IRA custodians better understand the rules and complexities of using your SDIRA to invest in real estate.
2. Select Your Investment Property
Once you've chosen your custodian, it's time to invest in real estate using your SDIRA. Find a property for investing.
It's important to consider various aspects of the property to ensure it will help retirement funds grow and not cost you more money in the long run. For example, consider the location, size, and neighborhood the property is in to determine if it's a good investment for you.
3. Choose A Real Estate Company That Specializes in SDIRA
Many real estate companies specialize in SDIRA. These companies have the knowledge and expertise to remove any confusion or hassle from buying a property.
They're skilled in ensuring you do not make a costly mistake and can provide any advice you may need to complete the transaction.
4. Buy the Property with Your SDIRA
You've chosen the real estate you'd like to purchase. The next step is to get approval from your custodian. Once approved, you can make an offer on the property in the name of the self-directed IRA.
When the offer is accepted, the property goes into escrow. This means that a third party will hold it while this step is completed. After that, the custodian files and signs documentation, and the deal moves forward as an average sales and purchase process would.
Can I Self Manage My SDIRA When Investing in Real Estate?
While you can decide on the type of real estate you want to own, you cannot manage your self-directed IRA when investing in one. As previously mentioned, you have to hire a custodian to do that.
This is because custodians have specialized knowledge on managing your SDIRA and the IRA property on your behalf. It's in your benefit to have a custodian manage your SDIRA investments to avoid tax complications.
Using a self-directed IRA gives you complete control of your money and investments. It allows you to build wealth that you can comfortably retire on.
But when you are purchasing an investment property with your SDIRA, this can be more complicated. Unless you have the time and expertise, it's advisable to seek out a specialized custodian or full-service real estate company that will help you with the entire process. They will also be able to help you avoid costly mistakes that could end up costing time, money, and a hefty tax bill.
What are the Top IRS Rules for Self-Directed IRAs?
A self-directed IRA (SDIRA) is in many ways similar to both a traditional IRA and Roth IRA. In fact, you can set up an SDIRA to function as either one.
These plans help save for retirement while providing tax benefits unseen in other investment products.
In exchange for these benefits, however, there are certain IRS rules for self-directed IRAs that an investor must consider before choosing an investment strategy.
How Does a Self-directed IRA Differ from Other IRAs?
The main difference between an SDIRA and a traditional or Roth IRA is the investment options.
SDIRAs allow you to invest in assets not necessarily traded openly in the secondary markets, such as partnerships, real estate properties, and even precious metals. If you can find a custodian willing to accept the plan’s terms, you can invest in almost anything (within reason, of course).
This wider range of permitted investments allows an investor to diversify an SDIRA portfolio beyond that provided by run-of-the-mill stocks and bonds. The increased high-risk/high-reward exposure is often attractive to investors who are still several years from retirement and have the time to recover from market dips.
What Are You Not Allowed to Put into a Self-Directed IRA?
While there are many asset types available to you, not everything is allowable in an SDIRA. IRS rules for Self-Directed IRAs do exclude certain investments. Three major exclusions are as follows:
Life Insurance
You are not allowed to buy whole, variable, or universal, life insurance products through an SDIRA (or any IRA, for that matter).
Your Home
While real estate properties, in general, are permitted, you are prohibited from investing SDIRA funds in any property that you either use personally or from which you benefit financially. This includes your permanent residence, vacation homes such as summer beach houses or cabins, and any rental properties registered under your name.
If you do manage a rental property, consider doing so via a separate business account to ensure that money remains legally separate from your personal SDIRA.
High-Risk Derivatives
SDIRA custodians will typically permit standard financial derivatives such as futures contracts on commodities or call options on equities. However, higher-risk derivatives that carry an unhedged risk component (meaning that exposure is unlimited) are not allowed by the IRS.
Who is Eligible for a Self-Directed IRA?
IRS rules for self-directed IRA eligibility are the same as those for either a traditional IRA or Roth IRA (again, depending on which type you choose).
There has never been an age limit for contributing to a Roth IRA. While contributions to a traditional IRA were in the past restricted to those investors under the age of 70 ½, that rule changed in 2019 with the passing of the SECURE Act. Now, you can make contributions at any age so long as you are employed.
There is also no age restriction for opening a new traditional IRA provided that the source of funds for the plan are assets being transferred from another IRA or other eligible retirement plan.
In the case of either IRA type, you must be earning taxable income to make contributions. The annual contributions limits for 2021 for both IRA types are $6,000 for investors under the age of 50 and $7,000 thereafter.
Who is Disqualified from a Self-Directed IRA?
The following would-be investment participants are defined as “Disqualified Persons” for purposes of your SDIRA:
- You (you cannot do business with yourself).
- Your spouse/partner.
- Your children.
- Your grandchildren.
- Any advisors or fiduciaries involved with your SDIRA.
- Any business entity in which you own 50% or more of the voting stock.
Top Five IRS Rules for Self-Directed IRAs
Like other IRAs, the IRS imposes certain rules on SDIRAs in return for their preferential tax treatment. In return, certain IRS rules for self-directed IRAs apply. Five of those rules are as follows:
1. The Prohibited Transaction Rule
Investors rarely find themselves involved in “prohibited transactions” because most IRAs are invested in traditional equity and bond portfolios. These investments are (typically by default) unallowed in transactions that would fall into this category.
However, when a prohibited transaction does occur, it is likely a result of dealings with a disqualified person — namely themselves.
This is commonly referred to as a “self-dealing” transaction and is often unintentional. While this blunder can happen in many ways, the most common (and as mentioned earlier) involve turning a profit on SDIRA-owned properties (such as a rental unit) or using funds to invest in a company that you at least partially own.
2. Contribution Restrictions
As discussed previously, an SDIRA follows the same rules as do traditional and Roth IRAs regarding contribution amounts and timing. Unlike a traditional or Roth IRA, however, all contributions and required minimum distributions must be made through the IRA directly — not into or from the IRA’s bank account.
3. Reporting Requirements
The IRS requires the owner of an SDIRA to complete and submit the following three forms:
- Form 990-T. This is used for filing any potential Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Income (UDFI).
- Form 5948. This form is used to disclose the market value of the SDIRA as well as a record of the prior year’s contributions.
- Form 1099R. This reports any distributions you receive from the SDIRA.
4. Using Your Self-Directed IRA as Credit
You cannot use an SDIRA to apply for a line of credit, including a basic credit card. Applying for credit involves making a legally binding promise that you will make good on repayment obligations. The IRS prohibits an SDIRA’s exposure to this practice.
5. Tax Considerations
While both a traditional IRA and Roth IRA provide a tax shelter while funds remain inside the account, this is not always the case with an SDIRA. More specifically, there are two possible (and uncommon) situations when taxes are owed before a withdrawal from the plan.
The first is the UBIT (as mentioned previously) which is a tax imposed on SDIRAs that are affiliated with an active business entity.
The second is the UDFI, which is a tax on any income earned from leveraged funds (i.e., borrowed money).
Self-directed IRAs can be a great way to diversify your retirement portfolio. They allow investment in products not available in more traditional investment plans while still preserving standard IRA tax benefits.
However, IRS rules for self-directed IRAs can be tricky, easy to miss, and — if not followed properly — may negatively impact the tax status of your investments.
Companies like Horizon Trust have a team of SDIRA experts dedicated to educating our clients on SDIRA rules and procedures, as well as providing seamless account set-ups and top-notch custodial services.
Top 7 Dos and Don’ts of Self-Directed IRAs in 2023 and Beyond
Without a doubt, you cannot work forever. Like it or not, you reach an age where, regardless of how skillful or productive you are at work, you have to step aside and let a younger generation take over.
Planning for the future and your years after retirement is essential. While you’ve been used to receiving a weekly paycheck, once you retire, this is no longer the case. So while you’re productive and earning, you need to plan for this eventuality.
This is where a self-directed IRA comes in.
What You Need to Know About Self Directed IRAs
A self-directed IRA is a retirement account that gives an individual control over their investment choices. An SDIRA can either be a Roth IRA (where you can take distributions tax-free) or a traditional IRA.
In simple words, it is a retirement saving plan that provides alternative investments such as real estate, life insurance, retirement savings, tax-deferred certificates, and tax advantage accounts among others.
Normally, banks act as custodians of the SDIRA account while the owner is given the driver’s seat to take control and hold the power to decide on their retirement plan.
Dos and Don’ts of SDIRAs
1. Do Start Early
Although an SDIRA is a saving account, it is also an investment account that adds value to your contribution. Just imagine a normal saving account and how the compounding returns increase your money.
The same concept applies to SDIRA contributions where you put your money away and have a self-selected method of compound returns on your money. On that note, if you happen to have a Roth IRA account, you get a tax break, as it offers growth and retirement withdrawals that are tax-free.
Thus, if you start to make self-directed IRA contributions early, your compounded returns will be high, and you will get a larger tax break.
2. Do Diversify with a Focus on Crypto and Real Estate
With your SDIRAs account, you take control of deciding what investments to take, and crypto and real estate are part of the alternative investments that we offer with an SDIRA. Your self-directed IRA may purchase real estate or property which becomes an asset for this account.
This is one of the popular investment choices for a self-directed retirement plan, and if your account does not have sufficient funds, a bank may make a loan arrangement and the property becomes the collateral. The intended property purchase should not be a prohibited transaction.
3. Do Check Out the Backdoor Roth IRA
As the word “backdoor” suggests, this SDIRA involves making an administrative arrangement with your custodian to sidestep income limits. This means your money is put into a traditional IRA, then some tax is paid and it’s converted into a Roth IRA.
The benefit is that even if you do not qualify to contribute to the IRA because of your income, you may make negotiations through back door. This is pretty sweet, as your money grows tax-free even when you will be taking out your money in retirement.
4. Don’t Check Out the Backdoor Roth IRA
The backdoor Roth IRA can both benefit or hurt your SDIRA depending on your tax bracket. If you are a high-income earner, a Roth IRA could likely hurt your finances in the account. This is something that the government uses to increase your tax.
This is because you will be paying taxes on the year you make Roth IRA contributions and it will be higher than a tax-deferred account in a traditional IRA.
5. Do Co-Investing for Expensive Assets
Think about alternative options, like having gold and silver as some of the assets that you may hold in your IRA account.
Even though there is some risk involved in dealing with these precious metals, it is a good choice to co-invest in these expensive assets given their unique stability, regardless of the economic volatility compared to other assets such as mutual funds and stocks.
6. Do Choose Your Custodian Carefully
The first task of investing in a self-directed IRA is to find the right custodian and the right investment alternatives that fit your retirement plan.
Given that you have an idea of the IRA and the type of investment you want, you may consider the following factors while looking for a self-directed IRA custodian:
- Ease of account maintenance and setup: How easy it is to open and maintain an SDIRA account with a custodian
- Fees: For administration, setup, and transaction cost
- Customer service: Efficiency in terms of helping a client with account issues
- Checkbook control: Whether a client can invest or direct investment by just writing a check
- Investment options: Ability to offer alternative investment options
7. Don’t invest in Prohibited Investments and Transactions
Under SDIRA, there are some prohibited investments, such as collectibles of tangible personal property such as rugs, stamps, art, gems, alcoholic beverages such as fine wines, antiques, and some precious metals.
Among the transactions prohibited are using an IRA for personal financial gains that are smaller than the available tax benefits. Simply put, self-dealing transactions are prohibited by the IRS.
Plan Ahead with an SDIRA
Securing your financial future in retirement is not difficult. If you start a plan with a self-directed IRA as early as you can while you’re still working and earning, you’ll be well ahead of the game, knowing that your golden years will be free of worry from financial woes.
Analyzing the Crypto Market: 4 Factors and Developments to Watch
For years, cryptocurrencies have fought their way to become mainstream financial instruments. However, 2020 brought significant changes to crypto markets that go beyond bigger-name recognition. Major companies and financial institutions began to take a closer look at Bitcoin as a long-term asset. For example, Tesla invested $1.5 billion in Bitcoin.
And it wasn’t alone. Financial institutions such as the U.K.-based Ruffer Investment Management have decided to invest in Bitcoin, as well. In Ruffer’s case, its slice of the cake amounted to $745 million in Bitcoin.
If you’re reading this, you likely follow Bitcoin pretty closely. It’s the best-known cryptocurrency in the world, but it’s far from the only viable option for individual investors. Here, I’ll outline some important factors to consider when it comes to analyzing crypto markets.
How To Spot Cryptocurrency Trends
Traditionally, investors rely on three types of analysis when deciding where to put their money. Let’s break down what those are:
• Technical: This kind of analysis focuses on detecting trends by looking at historical data and price movements. For example, when an institutional investor with big-name recognition announces a large investment in Bitcoin, the price often goes up.
• Fundamental: Fundamental analysis doesn’t focus solely on data; it also looks at what companies are doing and how they’re being managed. A crypto example would be Ripple, which is still embroiled in a lawsuit with the Securities and Exchange Commission. This means it probably won’t be a good year for the currency.
• Public perception: This is where articles, opinion pieces, and even tweets come in. If public perception of an asset, such as a cryptocurrency, is good, then its value might be headed up.
As an individual investor, relying on technical analysis is difficult because you likely don’t have access to the same sophisticated tools and comprehensive data as investment firms and hedge funds. That means if you’re trying to predict trends, you’ll generally want to analyze the fundamentals and public perception.
Four Cryptocurrency Developments To Watch
Understanding where the cryptocurrency market is headed and what is currently happening in it will help you make better financial decisions. Here are four cryptocurrency developments to watch.
• PayPal’s involvement in the space: PayPal debuted its crypto purchasing service in 2020 for U.S. users. The service has stated its intention to expand into international markets in 2021, making it easy for more of its users to invest in cryptocurrencies. That could translate to surges in the price of the cryptocurrencies the service supports, such as Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. At the moment, PayPal seems poised to double down on its investment by purchasing Curv, a crypto custody firm.
• Ethereum’s rise: Ethereum surged over 450% in 2020 and has continued to rise in 2021. In early February, the CME Group opened the floor for trading on Ethereum futures, which could fuel institutional investment and speculation in the market.
• Regulatory interest: As more money finds its way into the crypto markets, it’s only a matter of time until new regulations are created. Cases like the one against Ripple Labs are a clear signal that regulatory entities keep a close eye on the markets. Moreover, the U.S. Treasury Department recently issued a proposal that would deem some cryptocurrencies as monetary instruments, increasing recordkeeping requirements. If regulation becomes aggressive, that could scare away individual investors, but perhaps not institutional ones, who would gain more control over crypto markets.
• Continued market volatility: Despite significant institutional adoption, cryptocurrency markets are more vulnerable when it comes to “emotional” investing. And despite major cryptocurrencies such as Bitcoin and Ethereum being bullish, the market remains highly volatile partly due to the number of options open for investing. Until there is more mainstream crypto adoption, it’s unlikely for the markets to stabilize.
Keep Your Finger On The Pulse
Unless you have access to massive amounts of historical data, day trading cryptocurrencies is generally not recommended. Instead, investors will want to focus on fundamental analysis and invest in solid cryptocurrencies. If you invest in cryptos with a strong foundation for the long term, you’ll have a better chance of seeing earnings.
To be a savvy crypto investor, you need to keep up with the latest news in the market and monitor rising coins to decide if they’re worth your time or they’re just time bombs. If you can do that, you’ll be well ahead of the curve.
Consult with a licensed professional for advice concerning your specific situation.