Can I invest my IRA or 401(k) into Bitcoin and other cryptocurrencies? This is a question a whole lot of investors have been asking recently. The answer is a resounding “Yes”, and a Checkbook IRA LLC or Solo 401(k) is by far the superior means of participating in this exciting and dynamic asset class. Sophisticated crypto investors have been using this model for many years.
Is Cryptocurrency Investing Legal?
First things first, of course. IRS Notice 2014-21 determined that digital currencies are treated as personal property. An IRA is allowed to hold such assets.
IRA Tax Advantages
When you utilize a self-directed IRA to invest in cryptocurrency, all gains are tax-sheltered under the umbrella of the IRA. Investment income will have the same tax-deferred status of a traditional IRA/401(k). If you are using a Roth account, all investment gains and future distributions will be tax free.
Options for Investing in Cryptocurrency
In the last few years, a whole new industry has cropped up around the concept of investing retirement funds in cryptocurrency. Most all are from new, specialty service providers. Mainstream financial firms to not provide options for investing in virtual currencies via a conventional brokerage account. There are some digital currency derivatives such as private funds and more recently futures contracts available, but no method for direct IRA ownership of tokens.
Several digital currency brokers, mostly founded in the last few years by precious metals dealers, have entered the space, and created various crypto IRA platforms. In this model, your IRA is held by a self-directed IRA custodian, but must go through the broker for the purchase and sale of coins. On the plus side, this approach is simple and comes with very solid security. On the down side, all transactions will take 2-3 days to execute, and the brokers typically charge some pretty steep commissions, often as high as 10-15%, with the potential for custodial storage fees on top of that. These platforms are also limited to a handful of leading cryptocurrency assets.
Advantages of a Checkbook Plan for Cryptocurrency Investing
With a checkbook IRA LLC or Solo 401(k) plan you will have direct control over all aspects of investing in cryptocurrencies and can do so much more cost-effectively.
- You select one or more exchanges to work with
- You select and hold the wallet – physical or digital
- Invest in mainstream coins such as Bitcoin, Etherium and Litecoin, as well as a full range of altcoins
- Trade on-demand without the 2-3 day processing delays typical of many IRA coin broker arrangements
- Eliminate broker trading fees and commissions as well as custodial storage fees. You will only pay applicable exchange fees on trades.
Fees vary by plan type, but are static in nature and associated with the services necessary to build and support the plan vehicle itself. There are no variable fees based on the dollar value of the account or on a per-transaction/per-asset basis. This is often referred to as a “flat-fee” structure.
As with all investments made using a self-directed IRA or Solo 401(k), there are IRS rules that need to be complied with in order to retain the tax-sheltered status of the plan. Of primary concern is keeping all activities exclusively for the benefit of the plan and avoiding any kind of self-dealing or dealing with disqualified parties. Basically, this means you need keep the IRA or 401(k) investment activities entirely separate from your own or close family investments or finances.
Any cryptocurrency exchange account must be opened in the plan name – meaning the IRA-owned LLC entity or the Solo 401(k) trust. You may not open exchange accounts in your own name and place plan funds in such an account under any circumstances. Some US based exchanges such as Coinbase/GDAX, Kraken, Gemini, or Genesis will be able to open an institutional account for your plan entity. Other exchanges may not offer an institutional account format suitable for such US domiciled entities, but can open an account simply using the plan name. You may need to list yourself and even provide your identification or SSN as the “authorized person” on the account. This is fine, but the account itself must be for the plan.
The plan may use a variety of wallet options, including exchange hosted, 3rd party cloud wallets, or hardware wallets. Any such wallet should be purchased by the plan and used exclusively for holding plan-owned coins. You should not store plan coins on a personal wallet or hold both personal and plan-owned coins on the same wallet. Again, clear separation is the key.
Mining and Taxes
The purchase, holding, and eventual sale of digital tokens is generally considered a passive activity, and will therefore be fully tax sheltered under the umbrella of the retirement plan. When a tax-exempt entity engages in a trade or business on a regular or repeated basis as outlined in IRS Publication 598, however, that entity is subject to Unrelated Business Income Tax (UBIT). This tax is meant to level the playing field and shield tax-paying businesses from unfair competition when a tax-exempt entity is acting like a business.
Per IRS Notice 2014-21, cryptocurrency mining is considered a trade or business and would be viewed as self-employment income in the after-tax world. As such, an IRA or 401(k) participating in mining activities – directly or via a 3rd party arrangement – would be subject to UBIT. This tax, which can be as high as 39.6%, is generally going to be a disincentive for such pursuits.
We have only touched on the surface, but hope the information provided here helps you to better understand some of the potential and limitations that come with self-directed IRA or 401(k) investments into cryptocurrency assets. If you have an interest in diversifying your tax-sheltered retirement savings to include digital currencies, please feel free to contact us. One of our expert advisors will be happy to evaluate your specific situation and goals and provide guidance as to what may or may not work, as well as the best self-directed plan structure for your purposes. At Safeguard Advisors, investor education is job one.
As with any investment, there is risk associated with investing in cryptocurrencies. This is a particularly speculative asset class and subject to extreme volatility. Before investing in digital currencies, you should ensure you have the financial ability and experience to gauge and understand the risks, including the potential for a total loss of investment capital.
Safeguard Advisors, LLC is not an investment advisor or provider, and does not recommend any specific investment. We provide properly structured self-directed retirement plan platforms that provide you as the investor with full control over investment decisions. The information above is educational in nature, and is not intended to be, nor should it be construed as providing tax, legal or investment advice.