February 25, 2021
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Finance

Is it allowed to own Bitcoin and Other Cryptocurrencies in a Self-Directed IRA?

We have seen a growing interest in using IRA and other retirement plan funds to own Bitcoin and other cryptocurrencies, as the price of Bitcoin (BTC) has reached to $40,000. But will your IRA, Roth IRA, solo(k) or whatever the retirement account you have will allow cryptocurrency investment? The short answer is, Yes, bitcoin and other cryptocurrencies can be invested using an IRA. But there are certain considerations you should keep in mind before making that move.

Using blockchain technology, Bitcoin is a type of virtual currency and can be traded between parties for goods and services, or for dollars. When I wrote my first article on this subject and documented the video on how it works, I noticed that the value of Bitcoin has increased from $0.30 per Bitcoin to $2,550 per Bitcoin from 2011 to July 2017. It has reached $40,000 per Bitcoin recently. As investment interest and prices have risen, we have been asking investors questions about whether their retirement account will invest in real Bitcoin or other cryptocurrency types and own them.

Should You Own Bitcoin or Other Cryptocurrency in Your IRA?

“Well, the short answer is: “Yes, your IRA can own Bitcoin and other types of cryptocurrencies, such as Ethereum and Litecoin.” Life insurance, S-Corp stock, and collectibles are the only items that an IRA cannot invest in as referred to in IRC 408(m), referring to tangible personal property such as “art, rugs, coins, etc.” and “any other tangible personal property that the Secretary decides. As a consequence, because such investments are not limited, an IRA may own Bitcoin or another cryptocurrency. That means you can have a Bitcoin IRA account invested either partially or all of your retirement savings. 

How your earnings taxed on Bitcoin gains?

The IRS released IRS Notice 2014-21 concerning Bitcoin and cryptocurrency taxes, claiming that it is the property of Bitcoin and other forms of virtual currency. In general, the selling of property by an IRA is regarded as capital gain, so the acquisition and sale for investment purposes of cryptocurrency does not cause unrelated business income tax (UBIT) or other adverse tax effects that might sometimes occur in an IRA.

To own Bitcoin or other crypto currency with your IRA, there are three steps:

  1. First, with a custodian who allows for alternate properties, such as LLCs, you would need a self-directed IRA or another account. Our business, Self-directed IRA and Directed Trust Company, has worked with thousands of self-directed investors and can build a self-directed IRA, Roth IRA, or solo(k) account that can be used to invest in cryptocurrencies.
  2. Secondly, you are going to invest funds from the IRA into the LLC. An LLC will be 100 percent owned by your IRA, and that LLC will have a company checking account. Please check out my previous content for more background on IRA/LLCs.
  3. And third, the IRA/LLC will use its LLC company checking account to build a wallet through the wallet to invest and own Bitcoin or other crypto. The most frequently used Bitcoin wallet is through a business named Coinbase, and you can purchase, sell and digitally store your cryptocurrency using your wallet on Coinbase. Binance, Kraken, and Bittrex are other common sites and exchanges. The wallet is the procedure used to store the keys of the cryptocurrency used to transfer the cryptocurrency. You could use off-line hardware wallets purchased by the IRA/LLC or you can use online-based wallets, such as Coinbase.

Some publicly traded funds and other channels (e.g. Bitcoin Investments Trust) are now available where you can own shares in a fund that holds Bitcoin in turn. But, if you would like to own Bitcoin with your IRA directly, you would need to follow the measures outlined above.

There are even companies that will own Bitcoin and other cryptocurrencies directly without the need for an LLC in your account. This alternative has two disadvantages that investors should be mindful of. Next, the custodian of the IRA would have the crypto-currency keys.

The actual things you need to pass or sell the crypto to someone else are these keys. If the keys are lost, the crypto is lost as well. It would be like losing control of money. You have and keep the keys to the crypto currency when you use an IRA/LLC. This puts you, the investor, in greater charge and is why we have used the IRA/LLC platform to help own Cryptocurrency for self-directed IRA account holders.

Bear in mind, in the digital era, Bitcoin and other cryptocurrency styles have tremendous potential. Nevertheless, as with any new business investment, make sure that you proceed with caution, and do not “bet the farm” on only one investment or contract or “go all in.” There have been repeated instances of digital fraud and loss of keys that have been devastating for investors, so make sure that when investing with your IRA in Cryptocurrencies, you deal with reputable companies and sites.