Use our new AI tool to find the right Self-Directed IRA!

IRA Financial Blog

Crypto Private Key Options for Your Self-Directed IRA or Solo 401(k)

Crypto Private Key Options for Your Self-Directed IRA or Solo 401(k)

If 2022 taught crypto investors anything, it’s that having control of crypto private keys is a fundamental way to protect your cryptos from exchange-related risks and cyber hacks.  A private key is essentially a gateway to your crypto, and a malicious individual who has gained access to your private key can take control of your cryptos.  With the collapse of the crypto exchange FTX, many crypto investors, including retirement account investors, have looked for the best way to protect their assets from risks associated with a crypto exchange collapse or bankruptcy. Holding your private keys is a way to take control of your crypto and help safeguard your retirement. So, you may be wondering, can you hold your private keys with a Self-Directed IRA for Cryptocurrency or a Solo 401(k)? At IRA Financial, we allow you to hold your private keys. Keep reading to learn how you can benefit from our Self-Directed IRA solution.

What is a Cryptocurrency?

Cryptocurrency is a form of digital currency that is designed to be secure and, in many cases, anonymous.  The first cryptocurrency was Bitcoin, which was created in 2009 and is still the best-known and most traded. There has been a proliferation of cryptocurrencies in the past decade and there are now more than 1,000 available on the internet. It is a digital currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

Crypto Public & Private Keys

Every cryptocurrency wallet has a public and private key. Here are the definitions of each.

What is a Public Key?

A cryptocurrency public key is used to receive funds; the public key identifies your crypto. A public key allows you to receive a cryptocurrency transaction. It is made up of a cryptographic code that’s linked to a private key. While anyone can send transactions to the public key, you need the private key to “unlock” them. The public key can be searched on the blockchain. In other words, the public key is used to verify the digital signature, which proves ownership of the private key.  The public key is generated from the private key.

What is a Private Key?

A crypto private key is only used to sign transactions and prove you own the related public key. A private key is a large, arbitrarily generated string of alphanumeric characters with hundreds of digits. This secret number acts as a password to protect a cryptocurrency owner and is the key to unlocking access to the virtual vault that holds your cryptocurrency.

Crypto Exchanges & Private Keys

Most crypto investors are not aware that when purchasing cryptos on a centralized exchange, such as Coinbase, the cryptos acquired are automatically stored in your exchange-hosted wallet, which is generally custodial controlled.  In other words, the exchange has control of your crypto private keys, which means that you do not control the underlying crypto.  Therefore, the phrase “no keys, no cheese” has become such a popular slogan for traditionalist crypto investors.

Since the fallout of FTX and several other crypto exchanges which caused millions of crypto investors to lose control of their cryptos, more and more crypto investors are seeking to control their crypto private keys in order to secure ownership of the crypto. 

How to Control Your Crypto Private Key?

In general, there are numerous ways to control one’s crypto private keys.  It can be stored on a hot or cold wallet.  Hot wallets are connected to the internet, while cold wallets are not. Most people who hold digital assets have both cold and hot wallets because they are designed for different purposes. A cold wallet is a tool that stores Bitcoin and other cryptocurrencies offline (looks like a USB thumb drive).  To keep cryptos offline in a cold wallet means to reduce the threat of their abduction by hackers. If one is using a cold wallet, it is important to remember to keep the wallet somewhere safe and remember your password!

Can I Own Cryptos in a Retirement Account?

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 Bitcoin.  According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.”

The IRS is treating the income or gains from the sale of a virtual currency 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).  Hence, since an IRA and 401(k) plan can invest in property, such as stocks, a retirement account is permitted to invest in cryptocurrency.

On March 10, 2022, the Department of Labor (DOL) released Compliance Assistance Release 2022-01 (CAR 2022-01), which specifically addressed 401(k) plan investments in cryptocurrencies. 

The primary purpose of CAR 2022-01 is to put plan fiduciaries of 401(k) plans on notice to exercise “extreme care” in considering cryptocurrencies as part of 401(k) investment options for plan participants. This release comes one day after the White House released an executive order on digital assets.  The DOL Notice did not mention IRAs or Solo 401(k) plans and did not prohibit 401(k) plans from investing in cryptos, it simply cautioned plan fiduciaries about the risks of cryptos as a plan investment option.

Best Ways to Own Cryptos in a Retirement Account

You have multiple options when it comes to holding cryptocurrency in a retirement plan. If you are self-employed and have no employees, you can hold your private keys directly in your Solo 401(k). If you do not have self-employment activity, you can use a Self-Directed IRA LLC to hold your private keys. Alternatively, if you are not interested in holding your private keys, you can open a traditional Crypto IRA for just $100 per year. These options will be broken down below to help you understand your options when investing in cryptocurrency with retirement funds and how you can legally hold your private keys.

The IRA Financial Cold Wallet Crypto Solo 401(k) Plan Solution

The IRA Financial cold wallet crypto Solo 401(k) plan solution will allow a Solo 401(k) plan trustee to hold 401(k) plan-owned cryptos off the exchange and in a cold wallet.

IRAFI Crypto Logo 03 cropped 1

Who Can Setup a Solo 401(k) Plan?

Solo 401(k) plan is not a new type of retirement plan. It is a traditional 401(k) plan covering only one employee. In general, to be eligible to establish a Solo 401(K) plan, one must be self-employed or have a small business with no full-time employees (over 1000 hours during the year) other than a spouse or other owner(s).

How Does the Solo 401(k) Crypto Wallet Solution Work?

The IRA Financial Solo 401(k) cold wallet crypto solution will allow a plan participant to purchase cryptos using 401(k) funds and then hold the cryptos in a cold wallet off the exchange.  The reason that a Solo 401(k) plan trustee can hold cryptos off in an exchange in a cold wallet and not an IRA relates to the nature of the role of a 401(k)-plan trustee. 

In the case of an IRA, the IRA custodian is the trustee of the IRA and is required to custody IRA assets.  Whereas, regarding a Solo 401(k) plan, the trustee of the plan is required to hold plan assets in trust on behalf of the plan participant.  The trustee of a 401(K) plan may be an individual.  Below is an excerpt from the IRA Financial 401(k) plan document which has been approved by the IRS:

Powers of the Trustee

The Trustee will have the power, but, in the absence of proper direction from the Plan Administrator, not the duty, to take any action set forth below:

  • purchase or subscribe for securities or other property and to retain them in trust; to sell any such property at any time held by it for cash or other consideration at such time or times and on such terms and conditions as may be deemed appropriate.

Therefore, based on the IRS-approved 401(k) plan documents, a Solo 401(k) plan trustee can hold 401(k) owned property, such as cryptos, and “retain them in trust.” Whereas, using a self-directed IRA would not offer the IRA owner the same right since the IRA rules require the custodian or trustee to retain full control over the assets.  Hence, the IRA Financial Solo 401(k) plan cold wallet crypto solution would allow one to have 401(k) plan-owned cryptos moved off-exchange and held “in trust” by the trustee of the plan.  The Solo 401(k) plan solution would seemingly not violate the McNulty ruling, since McNulty only addressed the personal possession of an IRA-owned asset, which involves different rules than what would apply to the possession plan assets by a 401(k) plan trustee.

Crypto IRA LLC

Most crypto exchanges do not offer one the ability to open an IRA at a crypto exchange. The only legal way to purchase cryptocurrencies is through a regulated crypto exchange. Using an LLC wholly owned by an IRA has become a popular way to purchase cryptos. Opening a Crypto IRA using an LLC will allow the IRA owner to essentially use any exchange they wish to buy and sell cryptos, in the U.S. as well as internationally.

In addition, using a Crypto IRA LLC solution will offer the IRA owner with the ability to hold the crypto private key on a cold wallet.  Considering the FTX bankruptcy, holding one’s crypto private key has become almost a requirement from a security standpoint.  This is especially important when one owns cryptos in a retirement account. Moreover, using a Crypto IRA LLC would allow one to open a crypto exchange account at a foreign exchange and purchase XRP and other cryptos that may not be available in the United States.  Although, one should be cautious about holding cryptos on a foreign exchange, especially in light of FTX.

Below is a breakdown of how it works

  • Individual opens an IRA at IRA Financial, a regulated Self-Directed IRA trust company
  • IRA would own 100% of the LLC and you, the IRA owner, would serve as manager of the LLC
  • As manager of the LLC, you would open an account with any crypto exchange (i.e. Coinbase or Binance)
  • IRA owner would open the LLC account at the crypto exchange
  • The LLC’s bank account would be linked to the crypto exchange account
  • The IRA owner would have total control over the account and can hold cryptos on the exchange or pull cryptos off the exchange and hold in a cold wallet

The Crypto IRA LLC is the only Self-Directed IRA crypto solution that will offer a retirement account owner the ability to hold their crypto private key as well as use a US or foreign crypto exchange of their choice.  For more information on the rules surrounding the ability to hold your retirement account-owned cryptos on a cold wallet, please see below.

Crypto IRA Direct

We are very proud to have the industry’s best solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first self-directed retirement company to allow its clients to invest in cryptocurrencies directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC.

Now, investors can use their retirement funds to buy all the major cryptocurrencies directly through Bitstamp, one of the leading US cryptocurrency exchanges.  Bitstamp was founded in 2011 and is present in over 100 countries, with offices in the UK, Luxembourg, the USA, Singapore, and Slovenia, and caters to over 4 million customers across the globe.

The IRA Financial crypto solution is the first to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange.   The account is opened in the name of the IRA, but controlled by you as the authorized representative on the account.  The IRA holder has 100% control over the account and can trade anytime. 

How Does the IRAFI-Bitstamp Crypto Solution work?

Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.

Step 2: Move IRA or 401(k) funds to a new account tax-free.

Step 3: Funds are moved From IRA Financial to Bitstamp.

Step 4: Begin buying and selling cryptos 24/7 on the IRA Financial app on your own without the need for a broker or the use of an LLC.

With the Crypto IRA direct solution, you can invest in cryptos directly. In other words, you do not need a costly broker or LLC. In addition, the cryptos will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.


  • No requirement to use broker
  • No requirement to use LLC
  • 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


  • You can only purchase the most popular cryptocurrencies
  • The cryptos must be held on the Bitstamp exchange

Taking Possession of IRA Assets

The only provision in the Internal Revenue Code (“IRC”) that directly prohibits the IRA owner from personally possessing an IRA asset is IRC 408(m).  IRC 408(m) prohibits an IRA owner from taking personal possession of an IRS-approved precious metal or coin.  IRC 408 specifically requires that any IRS-approved precious metal owned by an IRA or 401(k) must be held at a U.S. trust company, such as a depository. 

Yet, other than precious metals or coins, which are tangible assets, there are very few tangible assets that can be purchased by a retirement account.  For example, case law is clear that an IRA owner can take possession of a stock certificate or real estate deed, which is titled in the name of the retirement account.  However, the emergence of digital assets, such as cryptos, presents a new and unique case where an asset is intangible but can be held tangibly.

For example, a crypto, which is an intangible asset, can also be held in a physical cold wallet.  There is currently no direct IRS guidance on whether a retirement account owner can take possession of a digital asset, however, a recent tax court case offered some insight as to the extent in which a retirement account owner can take greater control over an IRA asset.

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 clearly violated a provision in the tax code.  The tax court opinion did not reference cryptos in the written opinion, however, it went on in length about the concept of “unfettered command” over IRA assets. The court noted, “When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.”

In addition, the court went on to state that, “An owner of a Self-Directed IRA may not take actual and unfettered possession of the IRA assets. It is a basic axiom of tax law that taxpayers have income when they exercise complete dominion over.”  However, the court differentiated the case when the IRA owner merely acted as a conduit for the IRA asset but not maintain actual control over the asset.  Below is the language from the tax court opinion:

“While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. See Ancira v. Commissioner, 119 T.C. 135, 137-140 (2002) (holding no taxable distribution occurred when the IRA owner personally received a check that he could not negotiate, the funds were then used to acquire stock, and the stock certificate was issued in the IRA’s name); McGaugh v. Commissioner, at *13-*14 (holding no taxable distribution occurred even if a stock certificate was in the IRA owner’s possession but it issued in the IRA’s name and thus the owner could not realize any benefits from it and did not have constructive receipt of IRA assets); Dabney v. Commissioner, T.C. Memo. 2014-108 (holding a taxable distribution occurred when real estate was titled in the IRA owner’s name).”

Hence, in McNulty, the tax court was clear that an IRA owner should not have unfettered command over any IRA asset.  So how does the ruling in the McNulty case apply to taking control over retirement account-owed cryptos in a cold wallet? 

Navigating the McNulty Case for Crypto IRA Investors

After a careful read of the McNulty case, it would seem clear to many that taking personal possession of one’s retirement account-owed cryptos in a cold wallet is a no-no.  However, below are several points that could be considered that could offer some strength to the argument that the personal possession of cryptos in a cold wallet is unlike any other IRA asset.

  • Cryptocurrency is a new type of digital asset that is based off blockchain technology.  It is a unique asset because even though it is an intangible asset, it can still be held physically in a cold wallet.  Thus, applying the traditional rules of McNulty to a digital asset would be inappropriate.
  • The bankruptcy of FTX crypto exchange in November 2022, along with a number of other large crypto firms that went under, such as Voyager, Celsius, and Blockfi, has created a sense of urgency among crypto investors seeking to protect their cryptos from crypto exchange risk.  Cryptos held on an exchange are controlled by the exchange, and since the exchange controls the crypto private key, a crypto exchange bankruptcy will put cryptos on the exchange at risk. For retirement account investors shielding their crypto from exchange risks is even more vital since, for many Americans, their retirement account is their primary source of savings.  Hence, because of the nature of cryptos and its privacy features, keeping the cryptos safe and secure is even more paramount than precious metals or any other asset. 
  • Blockchains are entirely open and accessible to everyone. Thanks to the transparency of the blockchain, it is easy to track the movement of cryptos. If the identity behind a crypto wallet address is known, then the transactions made can be traced back and traced in the future. All these transactions can be viewed in detail.  Therefore, a retirement account owner would be able to provide to the IRS or any third-party that the crypto held in the cold wallet was not used for any personal purpose by simply providing the IRS with the crypto wallet number. This fact alone demonstrates that important differences between taking possession of a tangible asset, such as gold, versus, a digital asset.  The blockchain would provide the IRS or any third-party with audit and verification tools over a digital asset, which is not available for any other asset.
  • The internal technology team at IRA Financial is working on a multi-signature wallet option that will allow the retirement account owner to take personal possession of a crypto wallet but would need the signature of IRA Financial to move the cryptos off the wallet.  This would provide the retirement account owner with ability to protect themselves from crypto exchange exposure and hacking, while at the same time, satisfying the McNulty case since IRA Financial, as IRA custodian, will still maintain custody of the crypto.  Of course, providing the crypto owner with total control over the retirement account-owned cryptos would be ideal. However, based on the “unfettered command” requirement in McNulty, a multi-signature approach may ultimately be the most attractive option.
  • For retirement account investors seeking to use an LLC to invest in cryptos, moving the cryptos off the exchange to a cold wallet that is held at a depository, like metals, could be a solution.  The advantage of this option is that you would be able to get the cryptos off the exchange and held secure in a depository that specializes in safe keeping of valuable assets, such as gold. The downside is that you do not retain total control over the wallet, although, considering the McNulty case, retaining total control is likely not a viable option.

Putting it all Together

Considering the McNulty case, finding a way to hold cryptos owned by a retirement account on a cold wallet is quite difficult.  The facts in the McNulty case surrounded IRS-approved coins which IRC 408(m) requires to be held in the physical possession of a U.S. trust company.  Nevertheless, the tax court opinion is very broad and its focus on the prohibition of “unfettered command” over IRA assets is a difficult threshold to navigate.

Clearly, a dual signature wallet where the IRA custodian retains custody of the asset, and the individual does not retain “unfettered command” is ideal.  Alternatively, cryptos are a unique asset that cannot be compared to traditional, tangible assets, such as gold, especially from a security standpoint.  In addition, the fact that blockchain technology can track a crypto wallet could offer the IRS comfort relating to an IRA owner taking control of a crypto wallet.

Unfortunately, it is unlikely that the IRS will specifically address the matter of personal possession of retirement account-owned cryptos, so until a multi-signature wallet option is available, it may be best to proceed with caution.


Latest Content

Send Us a Message!