How to Use a Solo 401(k) Plan to Buy Cryptocurrency
What is Cryptocurrency?
For a growing number of investors, cryptocurrency is not only the future of money, but also 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 is also among the oldest, having first emerged in 2009. Over one year, the market capitalization for Bitcoin has increased enormously, from around $7.16 billion in May 2016 to $27.9 billion today. As the price of Bitcoin has risen over the last year, so has the confidence among investors, including 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 would be the easiest option to buy cryptocurrency, such as Bitcoins, Ethereum, or Litecoin. After verifying the account, the investor can add a number of payment methods, including credit or debit cards, U.S. bank accounts, or even wire transfers of funds. Cryptocurrency transactions are not anonymous and the identity of the currency owner can be traced back to a real-world identity.
As a cryptocurrency, Bitcoin is generated through the process of "mining" - essentially using 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, converting wealth from Bitcoin to U.S. dollars and other national currencies, back to dollars or Bitcoin. And that's how money is made.
Tax-Treatment of Buying Cryptocurrency with Non-Retirement Funds
Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoins and other cryptocurrency are not considered a “currency.” On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS 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." In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, as a capital asset, subject to either 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.
Advantages of Using a Self-Directed Solo 401(k) Plan to Invest in Cryptocurrency
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 type of transactions, such as the purchase of collectibles, life insurance (in the case of an IRA), as well as any transaction that directly or indirectly personally benefits a disqualified person. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the Solo 401(K) Plan participant and his/her lineal descendants (parents, children, spouse, daughter/son-in-law) and any entities in which the plan participant or a disqualified person holds a controlling equity or management interest. Cryptocurrency does not generally fall into any of the category of prohibited transactions and is, thus, an allowable investment for an IRA or 401(k) Plan.
The IRS tax treatment of virtual currency has created a favorable tax environment for retirement account investors. In general, when a retirement account generates income or gains from the purchase and sale of a capital asset, such as stocks, mutual funds, real estate, etc., irrespective of whether the gain was short-term (held less than twelve months) or long-term (held greater than twelve months), the retirement account does not pay any tax on the transaction and any tax would be deferred to the future when the retirement account holder taxes a distribution (in the case of a Roth IRA or Roth 401(k) plan no tax would be due if the distribution is qualified). Hence, using retirement funds to invest in cryptocurrencies, such as Bitcoins could allow the investor to defer or even eliminate, in the case of a Roth, any tax due from the investment. Note – retirement account investors interested in mining Bitcoins versus trading could become subject to the Unrelated Business Taxable Income tax rules if the “mining” constituted a trade or business.
How to Use a Self-Directed Solo 401(k) Plan to Invest in Cryptocurrency?
Working with IRA Financial Group to purchase cryptocurrencies, such as Bitcoins, Ethereum, Ethereum Classic, or Litecoins, with a self-directed Solo 401(k) Plan is quick and easy.
1. Confirm you are eligible to establish a Solo 401(k) 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).
2. Work with IRA Financial Group to establish an IRS approved self-directed Solo 401(k) Plan.
3. 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.
4. 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 be rolled into a Solo 401(k) plan.
5. 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.
6. 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 interested 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) Plan structure. The whole process can be handled by phone, email, fax, or mail, and typically takes between 4-10 days to complete, the timing of which largely depends on the custodian currently holding your retirement funds. Our self-directed 401(k) experts and tax and ERISA attorneys are on site, greatly reducing the set-up time and cost. Most importantly, each client of the IRA Financial Group is assigned a tax professional and CPA to help with the establishment of the IRS approved self-directed Solo 401(k) plan structure,
Why Work With the IRA Financial Group?
The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish IRS compliant Self-Directed retirement solutions. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and IRA knowledge in this area is unmatched.
To learn more about using a self-directed Solo 401(k) Plan to purchase cryptocurrencies, such as Bitcoins, without tax, please contact one of our self-directed retirement experts at 800-472-0646 for more information.
Did you know? You can use a Solo 401(k) Plan to buy Bitcoins without tax.