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Crypto IRA – Do I Have Access to My Private Keys?

Key Points
  • Crypto IRAs are legal
  • Private v Public Key is an important distinction
  • IRA Financial can help you

There is a well-known saying among crypto enthusiasts – “no keys, no cheese.”    The idea behind this phrase is that without having total control over your Crypto IRA private keys you don’t really have complete ownership of the cryptos.  Unfortunately, when it comes to a Crypto IRA, holding your IRA private keys is not so simple.

Crypto IRA & The IRS

Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoin and other cryptocurrency are not considered a “currency.”   In Notice 2014-21, the IRS offered guidance on the tax treatment of cryptocurrency. The IRS Notice was clear that virtual currency, such as cryptocurrency, should treated as property for U.S. federal tax purposes, just like stocks or real estate.  Therefore, since an IRA and 401(k) plan can invest in capital assets, such as stocks and real estate, a retirement account is permitted to invest in cryptocurrency.

What is a Crypto IRA?

A Crypto IRA is a type of Self-Directed IRA that allows one to invest in cryptocurrency.  There are a variety of different types of Crypto IRAs.  The most common is a Crypto IRA where a crypto account is opened at a regulated exchange, such as Bitstamp, and the IRA owner has direct control over the crypto investments.  The IRA is custodied by a Self-Directed IRA custodian, such as IRA Financial, while the cryptos are held for custody at Bitstamp, for example. It is important to review the fees involved and make sure a third-party broker is not charging excessive commissions and/or annual asset valuation fees.  Also, some Self-Directed IRA providers only allow you to invest in cryptos with their crypto IRA program, whereas, companies, such as IRA Financial, allow you to buy cryptos as well as any permitted IRA investments, such as real estate, private placements, investment funds, precious metals, and much more for one low flat fee.  Also, not all Crypto IRA providers allow you to move your Crypto IRA assets off an exchange and hold them in a cold wallet where you can control the crypto’s private keys.

What is a Crypto IRA Private Key?

The concept of cryptocurrency keys is to verify that a spent transaction was indeed signed by the owner of the funds and was not forged. When one owns cryptocurrencies, controlling the private key demonstrates your ownership of the associated cryptocurrency. In essence, your private key unlocks the right for the crypto owner to control the associated cryptocurrencies and, thus, have the power to spend it. Since the private key is the pathway to access to your cryptocurrencies, it should remain private. Hence, gaining control of your crypto’s private key is a common way to ensure a higher level of security for the underlying cryptocurrency.

The crypto public key is akin to a username, and identifies the wallet so that other parties know where to transfer coins during a transaction. Whereas, the private key is similar to a password, and is the wallet’s owner’s special access code which acts as a security device to help make sure others cannot access the cryptos stored within.

What is a Cold Wallet?

The onus to keep your cryptocurrency secure typically falls on the Crypto IRA owner. The Crypto IRA owner must decide how to store Bitcoin and other cryptocurrency tokens in the safest, most secure way possible.

For a Crypto IRA investor, crypto wallets operate in a similar way to traditional wallet most of use to hold cash and credit cards. In the crypto universe, wallets can be thought of as a storage device for cryptocurrency tokens. A crypto wallet can be a physical or digital medium for storing your crypto public and private keys.

A cold storage wallet is essentially a storage devices like a USB drive which are  used to keep the crypto public and private keys. Such devices, such as a Ledger Nano, can be kept safe in a safe or deposit box to make sure that they don’t fall into the hands of any bad actors.

Hardware cold wallets, such as the Ledger Nano, are becoming the most popular way to secure a wallet in an offline mode not connected to the internet. These are small devices which are water and virus proof and even support multi signature transactions.  Many Crypto IRA investors wish to hold their IRA owned cryptos in a cold storage wallet for security purposes, however, a recent tax court case creates some complexity for Crypto IRA investors.

The McNulty Case

In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), the tax court ruled that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset.  The McNulty case involved a taxpayer who used a Self-Directed IRA LLC to invest in precious metals and real estate.  The McNultys decided to take personal possession of the IRA-owned coins, which violated a provision in the tax code.  However, the tax court’s opinion focused on the taxpayer’s personal possession of the IRA owned cryptos, which can have significant implications for Crypto IRA owners who wish to hold their cryptos in a cold wallet.  The tax court did not reference cryptos in the written opinion, however, since cryptos can be held physically in a cold wallet, the court’s ruling in McNulty seemingly would prohibit a Crypto IRA owner from holding the IRA cryptos in a cold wallet in their personal possession. 


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