How to Invest In Cryptocurrency With a Self-Directed IRA

Investing in Bitcoin and other cryptocurrencies has been one of the most popular options for self-directed IRA investors in 2021.

The appeal is obvious.  Digital assets have the potential for significant short-term gains in value.  Being able to shelter those gains from taxation inside of an IRA is an exciting concept for a lot of investors.

At Safeguard Advisors, we have been helping investors hold digital assets since 2013.  Having taken investors from wanting to invest to actually holding cryptocurrency in their self-directed IRA or Solo 401(k), we’ve seen a lot and learned a lot along the way.

Yes, Your IRA Can Invest in Bitcoin

The IRS issued Virtual Currency Guidance in 2014 with notice 2014-21.  Since virtual currencies are deemed to be convertible currencies that can be traded for US dollars, they are an acceptable asset for an IRA or 401(k) retirement plan.

A Checkbook IRA Has Many Advantages

Several IRA providers have created platforms that allow your IRA to hold digital assets.  These solutions are relatively simple to setup offer solid security.  They also have limitations in terms of token choice, lack of personal control over storage, and high per-transaction and storage fees.

A checkbook plan such as an IRA owned LLC or Solo 401(k) trust increases your flexibility and control, while reducing fees.

  • You can open a trading account with one or more US based exchanges offering a wide choice of tokens.
  • You can control key storage using a cold storage provider of your choice or a hardware wallet.
  • There are no per transaction or storage fees at the retirement plan level. You will only pay platform fees on the exchange you choose to work with.

It Will Take Time

If you are hoping to jump in and buy the current dip, you will be disappointed.

Starting the process with proper expectations is helpful.  It can take 4-6 weeks and even longer to get your plan infrastructure and funding in place to start investing.

Open Your Self-Directed Plan

It all starts with establishing your Checkbook IRA or Solo 401(k) plan.  The setup and initial funding of your plan via transfer or rollover can take from 2-3 weeks, depending on where funds are coming from.

As part of your plan setup, you will establish a checking account for your IRA owned LLC or Trust, or Solo 401(k) trust.

Select A Cryptocurrency Exchange

You must open an institutional or business style account with a US based exchange that can recognize your entity format.  You may not open an individual account in your own name.

Depending on your plan type, you may be opening an account for an LLC, an IRA trust, or Solo 401(k) trust.

Not all firms can support all these formats or offer their services in all locations.  While access to cryptocurrencies is expanding, some states such as Hawaii, New York, and a handful of others may not be served by all exchanges.  Be sure the exchange you want to work with can offer service in your state of residency.

As of this writing, the following are some of the leading exchanges that can open business/institutional accounts for US based investors:

  • Binance.us
  • Bittrex
  • BlockFi
  • Coinbase Institutional
  • Gemini
  • ItBit
  • Kraken
  • Uphold

Open A Cryptocurrency Exchange Account

Safeguard will provide you with the necessary entity documents and tax ID, usually within a few days.  LLC formation in a handful of states can take up to two weeks.

While you can start the application process as soon as you have your plan documents, you may not be able to complete your account setup until your Checkbook IRA or Solo 401(k) has fully funded.  Many exchanges request a “proof of funds” document and will want to see a statement from your entity checking account.

The time required to setup an exchange account varies greatly by firm and can be dependent on demand.  Expect at least a week for the setup of a business/institutional account.  The extra document requirements of an entity account make this a longer process than a personal account.  If things get busy, it can commonly take 2-4 weeks to open an account.

… or Two

It may not be a bad idea to submit applications to more than one exchange and see which one comes back first.

It is not entirely uncommon for an application to simply disappear.

We applied with one firm in 2017 and heard back in 2019.  Seriously.

Fund Your Exchange Account

Once your cryptocurrency exchange account is setup, funding is easy.  You can simply send funds from your plan checking account to the exchange via wire or ACH.

It may take a few days to initiate and verify a small test transaction between accounts before you can process a transfer.

Arrange for Storage

One of the main advantages of using a checkbook IRA or Solo 401(k) to invest in cryptocurrencies is the ability to directly control storage.  While you can certainly use on-exchange storage, there are risks of loss in the event of a hack.  For more secure storage you may want to use a certified cloud based cold-storage provider or a hardware wallet.

Any storage must be in the name of your plan entity and the fees for storage must be paid with plan funds.  You should never store IRA and personal tokes on the same hardware wallet, for example.  If you plan to use a hardware wallet, you should purchase a new wallet using plan funds.  Gifting a personally owned wallet to your IRA or 401(k) could be viewed as a self-dealing prohibited transaction.

Your plan can arrange for purchase of a wallet as soon as the checking account is setup and funded.  You do not necessarily need to wait until your crytpo exchange account is setup.

Keep Records

The great thing about investing in Bitcoin and other digital assets in your self-directed IRA is that you do not have to report capital gains on every sale or trade.  That eliminates a lot of paperwork.

You still need to be able to illustrate that all holdings of your plan are fully segregated from personal finances, so it is a good idea to keep basic records of your account activity.

You will also need to report the fair market value of your holdings at the end of each year.  As such, you will want to have the records to easily sum up the various tokens held by your plan and their values on December 31st.

Cryptocurrency is not for Everyone

While the potential for high returns is real, so is the potential for loss.  Cryptocurrency is a speculative and volatile asset class.

There is also a considerable technology barrier to entry.  While our team can get you control over your IRA and the ability to invest in anything the IRS rules allow for – including cryptocurrency – we cannot open an exchange account or setup your hardware wallet for you.  Customer service in the cryptocurrency exchange space does not typically include phone support, so a certain amount of technical savvy and independence is required.

For non-technical investors just wanting to place a smaller sum less than $20K into cryptocurrency to have exposure to the asset class, a platform-based solution might be more effective.  The per transaction costs will be higher, but the simplicity factor may be worth that trade-off.

Investors who are comfortable with the digital asset space and are working with a larger amount of capital or pursuing a more active trading strategy will find that an IRA or Solo 401(k) with checkbook control is by far the best tool for the job.

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