Legality of Bitcoin IRA
The IRS has confirmed that one can use retirement funds to start a bitcoin IRA. IRS Notice 2014-21 held that cryptocurrencies, such as bitcoin, shall be treated as property for federal income tax purposes. Accordingly, just like stocks and real estate, cryptocurrencies, such as bitcoin, may be purchased with IRA funds. The question then becomes, if one is interested establishing a bitcoin IRA, what is the best way to do so?
Pursuant to Internal Revenue Code Section 408, all IRA accounts must be held for investors by a bank, financial institution, or state approved trust company, such as the IRA Financial Trust Company. A self-directed IRA is an IRA held by a custodian that allows for a broader and more diverse set of investments than is permitted by traditional IRA custodians, such as banks. Self-Directed IRA custodians will allow investors to invest retirement funds in other types of assets such as real estate, promissory notes, private placement securities, and even cryptocurrencies using a bitcoin IRA.
There are generally two ways to purchase cryptocurrencies with IRA funds: (i) The Bitcoin IRA Broker/Custodian Controlled approach, and (ii) the Wallet Control Bitcoin IRA LLC solution. Both structures have some advantages and disadvantages.
Bitcoin IRA Broker/Custodian Controlled
With the Bitcoin IRA Broker/Custodian Controlled approach, the IRA investors must purchase the cryptocurrency through a broker associated with the Bitcoin IRA company. A bitcoin IRA investor will open a self-directed IRA account with a bitcoin IRA custodian. The IRA investor will then transfer or rollover his or her retirement funds tax-free to the new IRA custodian. The custodian will then transfer the funds to a broker who will purchase the bitcoin for the IRA investor. The bitcoin IRA is typically purchased by phone and the investor is limited to investing in the limited cryptocurrencies offered by the broker. Once the bitcoin IRA has been purchased by the broker they are stored in a digital wallet, which typically requires multiple signature verification. However, the IRA investor does not control the IRA wallet or the associated private key. In addition, selling or exchanging the bitcoin IRA requires interaction with the broker and cannot be done online or after business hours. Furthermore, commissions are imposed on each side of the transaction and can run as high as 25%.
- Very Hands-off
- No need to interact with cryptocurrency exchanges
- High fees – commissions can range from 15%-25% of IRA funds invested
- Lack of control over the cryptocurrency wallet
- No access to bitcoin IRA wallet private key
- Lack of ability to trade bitcoin IRA 24/7 which is how the cryptocurrency market operates
- All bitcoin IRA trades must go through the broker, which is typically done by phone and only during business hours.
- IRA custodian fees are based on the value of the IRA assets invested
Wallet Control Bitcoin IRA LLC
With the Wallet Control Bitcoin IRA LLC, the IRA investor establishes an IRA account with a self-directed IRA custodian. The IRA investor then rolls over his or her retirement funds tax-free to the new custodian. The IRA assets will then be transferred to a newly established limited liability company (“LLC”) tax-free in exchange for 100% interest in the newly established LLC. The LLC will be wholly owned by the IRA and will be managed by the IRA investor. Since the LLC is owned 100% by an IRA, it will be treated as a disregarded entity for tax purposes. No Federal income tax return is required to be filed and all income and gains from the cryptocurrency investment will flow back to the IRA without tax. The IRA investor, as manager of the LLC will then open a cryptocurrency exchange account at the exchange of their choice and then link the account to the IRA owned LLC bank account. The IRA LLC funds will then be wired to the cryptocurrency exchange account. The IRA investor will then have the ability to invest in any cryptocurrency and have the opportunity to trade the cryptos anytime. The IRA investor will also have the ability to hold the cryptos purchased in a digital or hard wallet which he or she controls as manager of the IRA LLC.
- Ability to invest in all cryptocurrencies
- Ability to control costs by selecting cryptocurrency exchange of your choice
- Ability to control cryptocurrency wallet – control over private key
- Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application
- Flat low annual IRA custodian fee – no asset valuation fees
- LLC set-up cost
- More involvement required by IRA investor
Whatever platform you decide to use if contemplating investing retirement funds into cryptocurrencies, it is vital that you understand the financial risks involved. Bitcoin IRA investors should have the financial ability to bear the risks of a cryptocurrency investment, and a potential total loss of their investment. Cryptocurrency investments 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.
To learn more about how to use a self-directed Bitcoin IRA, please contact a self-directed IRA Expert at 800-472-0646 or visit www.irafinancialgroup.com