What is Cryptocurrency?
For a growing number of investors, cryptocurrency is not only the future of money. It’s an attractive and potentially profitable investment asset, though highly risky and volatile. Bitcoin has become the public’s most visible and popular cryptocurrency and it’s among the oldest. (It first emerged in 2009). Over one year, the market capitalization for Bitcoin has increased enormously. In May, it was around $7.16 billion. Today, Bitcoin is at $27.9 billion.
As the price of Bitcoin has risen over the last year, so has the confidence among investors. This includes retirement account investors.
The process of buying cryptocurrency is still somewhat unclear for a lot of people. It’s not a stock or a traditional investment. For most people in the U.S., Coinbase may be the easiest option to buy cryptocurrency, like Bitcoins, Ethereum, or Litecoin. After verifying the account, the investor can add a number of payment methods. This includes credit or debit cards, U.S. bank accounts, or even transfer wire funds.
Cryptocurrency transactions are not anonymous and it’s easy to the identity of the currency to a real-world identity.
As a cryptocurrency, Bitcoin comes from the process of “mining.” Essentially, this uses your computer’s processing power to solve complex algorithms called “blocks.” One can buy and sell Bitcoin on an exchange, much like a physical currency exchange. This converts wealth from Bitcoin to U.S. dollars and other national currencies, back to dollars or Bitcoin. And that’s how you make money.
Understand Tax-Treatment when Buying Cryptocurrency with Non-Retirement Funds
Even though people label Bitcoin as a “cryptocurrency”, from a federal income tax standpoint, Bitcoins and other cryptocurrency are not truly “currency.” On March 25, 2014, the IRS issued Notice 2014-21. For the first time the IRS set forth a position on the taxation of virtual currencies, such as Bitcoins.
According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.” The Notice further stated, “General tax principles that apply to property transactions apply to transactions using virtual currency.”
Essentially, the IRS treats the income or gains from the sale of a virtual currency (such as Bitcoins) as a capital asset. This makes virtual currency subject to short-term (ordinary income tax rates) or long term capital gains tax rates, if the asset is held greater than twelve months. (15% or 20% tax rates based on income). By treating bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-keeping rules – and significant taxes – on its use.
Benefits of a Self-Directed Solo 401(k) for Bitcoin
The Internal Revenue Code does not describe what a retirement plan can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. This includes the purchase of collectibles, life insurance (in the case of an IRA), as well as any transaction that directly or indirectly benefits a disqualified person.
The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of scenarios, but generally includes the Solo 401(k) Plan participant and his/her lineal descendants. This includes parents, children, spouse and daughter/son-in-law. It also includes any entities in which the plan participant or a disqualified person has a controlling equity or management interest.
Cryptocurrency does not generally fall into any of the category of prohibited transactions and is an allowable investment for a Solo 401(k) for Bitcoin plan.
The IRS tax treatment of virtual currency has created a favorable tax environment for retirement account investors. Usually, when a retirement account generates income or gains from the purchase/sale of a capital asset, the retirement account doesn’t pay tax on the transaction. Taxes are deferred to the future when the retirement account holder taxes a distribution. Therefore, when you use retirement funds to invest in cryptocurrencies, such as Bitcoin, the investor can defer or eliminate (in the case of a Roth) any tax due from the investment.
Retirement account investors who have interest in mining Bitcoin versus trading may become subject to the Unrelated Business Taxable Income tax rules. This is if the “mining” constitutes a trade or business.
How to Use a Self-Directed Solo 401(k) Plan to Invest in Cryptocurrency?
When you work with IRA Financial Group to purchase cryptocurrencies such as Bitcoins, Litecoins and Ethereum with a Self-Directed Solo 401(k) Plan, the process is quick and easy.
Confirm you are eligible to establish a Solo 401(k) for Bitcoin Plan. One must be self-employed or have a small business with no full-time employees other than the owner(s) or owner(s) spouse(s).
Work with IRA Financial Group to establish an IRS approved self-directed Solo 401(k) for Bitcoin Plan.
Open a bank account for the Self-Directed Solo 401(k) Plan at a local bank or financial institution, such as Fidelity or Schwab. IRA Financial Group has relationships with most of the popular banks and financial institutions, so opening a bank account will be quick and easy.
Rollover of retirement funds, cash or in-kind, tax-free to the new self-directed Solo 401(k) Plan account. Note – a Roth IRA cannot roll into a Solo 401(k) plan.
You, as trustee of the Solo 401(k) Plan, will have checkbook control over all the assets/funds in the Solo 401(k) Plan to make cryptocurrency investments.
Since a 401(k) Plan is exempt from tax pursuant to Internal Revenue Code Section 401, all income and gains from the cryptocurrency investment will flow back to the 401(k) plan without tax.
Cryptocurrency investments, such as Bitcoins, are risky and highly volatile. Any investor who has interest in learning more about Bitcoins should do their diligence and proceed with caution.
The IRA Financial Group will take care of the entire set-up of your Self-Directed Solo 401(k) for Bitcoin. We can handle the process by phone, email, fax, or mail. It typically takes between 4-10 days to complete, but the timing is largely dependent on the custodian holding your retirement funds.
Our Self-Directed 401(k) experts and tax and ERISA attorneys are on site and can significantly reduce set-up time and cost. More importantly, each client of the IRA Financial Group receives a tax professional and CPA. This will further help you establish an IRS approved self-directed Solo 401(k) plan structure.
It doesn’t matter what platform you choose to invest your retirement funds in cryptocurrencies. The important element is to understand the financial risks with such an investment. Investors must have the financial ability to bear the risks of a cryptocurrency investment. And the potential total loss of that investment. Cryptocurrency investments, such as Bitcoins, are uncertain and highly volatile. Any retirement account investor interested in using retirement funds to invest in cryptocurrencies should do their diligence and proceed with caution.
Did you know?
You can buy Bitcoin and other cryptocurrency with your Solo 401(k) for Bitcoin Plan and generate tax-deferred gains or tax-free gains, in the case of a Roth Solo 401(k) plan.