If you are self-employed, you can use the Solo 401(k) to buy cryptocurrency. The Solo 401(k) is a unique retirement plan designed for self-employed individuals and small business owners. Individuals who do not meet the eligibility to open a Solo 401(k) can still use a Self-Directed IRA to buy Cryptocurrency.
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. At the time of writing this article (11/16/2021), Bitcoin has made a comeback. Currently, it is over $60,107, the highest price for Bitcoin in 12 months. 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.
Like Bitcoin, Ethereum has also made substantial gains and hit record highs. The growing popularity and rising prices of Cryptocurrency has led many individuals to explore using retirement funds to invest in Cryptocurrency.
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., an exchange, such as Bitstamp, may be the easiest option to buy cryptocurrency. This includes the most popular:
After verifying the account, you can add a number of payment methods. This includes credit or debit cards, U.S. bank accounts, or transfer wire funds.
Cryptocurrency transactions are not anonymous and it’s easy to identify the currency to a real-world identity.
Read More: Solo 401(k) Investments
Bitcoin comes from the process of “mining.” Essentially, this uses your computer’s processing power to solve complex algorithms called “blocks.” You 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.
Tax-Treatment for Cryptocurrency with Non-Retirement Funds
Many people label Bitcoin as a “cryptocurrency.” However, 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). And if held greater than 12 months, long term capital gains tax rates. (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.
Related: Solo 401(k) Loan
Benefits of a Self-Directed Solo 401(k) for 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 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.
Read More: Solo 401(k) Eligibility
The definition of a “disqualified person” extends into a variety of scenarios. However, it 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.
Learn More: Has the IRS Banned Crypto in Retirement Accounts?
Bitcoin and the Prohibited Transaction Rules
Cryptocurrency does not generally fall into any category of prohibited transactions. Therefore, it is an allowable investment for a Solo 401(k) 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 Buy Cryptocurrency
When you work with IRA Financial Group to purchase cryptocurrency, like Bitcoin, the process is simple with a Bitcoin 401(k) (Solo 401k Plan for Bitcoin investments).
1. Confirm Eligibility
Confirm you are eligible to establish a Crypto 401(k). Essentially, this is a Solo 401(k) plan to buy cryptocurrency, like Bitcoin. You 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. Establish Account
Work with IRA Financial Group to establish an IRS approved Self-Directed Solo 401(k).
3. Open a Bank Account
Next, 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 Funds
Rollover of retirement funds, cash or in-kind, tax-free to the new self-directed Solo 401k Plan account. Note – a Roth IRA cannot roll into a Solo 401k plan.
Learn More: How to Complete a Solo 401(k) Rollover
5. Gain Checkbook Control
Because you’re trustee of the Solo 401(k) plan, you have checkbook control over all assets/funds in the plan to make cryptocurrency investments.
6. Earn Tax-free Gains
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.
*If you are not eligible for a Solo 401(k) you may still be eligible for a SEP IRA.
Be Cautious with Your Crypto 401(k)
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) Bitcoin plan. 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. This will further help you establish an IRS approved self-directed Solo 401k 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. Cryptocurrency is still extremely risky and volatile. Investors must have the financial ability to bear the risks of a cryptocurrency investment, and the potential total loss of that investment.
Any Bitcoin 401(k) investor interested in using retirement funds to invest in cryptocurrencies should do their diligence, learn about virtual currency and its blockchain technology, and proceed with caution.
Get in Touch
Do you have questions about using your Solo 401(k) for Bitcoin and/or other cryptocurrency? You can contact IRA Financial Group at 800-472-0646. Or speak with an on-site 401(k) specialist to answer your questions.
Did you know?
Because the IRS treats cryptocurrency, including Bitcoin and Ethereum, as property for income tax purposes, you can buy virtual currency (cryptocurrency) with your Solo 401(k). Opening a self-directed retirement account allows you to invest in a wide range of alternative assets including gold, real estate, private businesses, and more. Contact our specialists today for more information.