Crypto IRA or Bitcoin IRA is not a term of art or a legal term. Just like Real Estate IRA or Gold IRA, a Crypto or Bitcoin IRA simply refers to an IRA that can hold alternative assets, such as real estate, private equity, notes, and even Bitcoin.  Traditional financial institutions do not allow IRAs to invest in IRS approved alternative assets, such as real estate, because their focus is on earning fees through traditional investments. Hence, the birth of the Self-Directed IRA industry. 

 

Today, the Retirement Industry Trust Association (RITA) estimates anywhere between 2-3% of all IRAs are invested in alternative assets.  Accordingly, the Self-Directed IRA is the only way one can purchase Bitcoin in an IRA.  In fact, within the industry, the act of purchasing Bitcoin in an IRA is simply referred to as a Self-Directed IRA holding Bitcoin since a Self-Directed IRA can invest in so many types of assets and not just Bitcoin. 

Note – Both a Self-Directed IRA and Solo 401(k) plan can essentially invest in almost any investment except for collectibles (i.e. art), life insurance (an exception applies to 401(k) plans), or any prohibited transaction outlined in Internal Revenue Code Section 4975 which essentially involves any investment between the retirement account and any “disqualified person.” A “disqualified person” is generally defined as the retirement account holder and of his or her lineal descendants or any entities controlled by such persons.

Can You Buy Crypto in an IRA?

In general, the answer is yes since the IRS treats Bitcoin and other cryptocurrencies as property as per IRS Notice 2014-21.  Hence, just like stocks or real estate, Bitcoin can be purchased in an IRA or 401(k) .  However, from a practical standpoint, an employer-adopted 401k plan with employees will likely not allow for any alternative asset investment options because of the ERISA fiduciary rules.  However, in the case of a Solo 401(k) plan, which is not subject to the ERISA rules since there are no non-owner employees, Bitcoin and other alternative asset investments are common so long as the plan documents allow it.

How Does the IRA Financial Crypto IRA Work?

There are several ways to purchase Bitcoin or other cryptocurrencies with an IRA.  To get started, an IRA custodian, such as IRA Financial Trust, must custody the IRA and facilitate the investment on a regulated cryptocurrency exchange, such as Gemini. As a result, some Bitcoin IRA companies have popped up which are essentially third-party brokers.  They are not IRA custodians and are not licensed. 

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 is the first Self-Directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via Gemini, one of the market’s leading cryptocurrency exchanges, 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.

The IRA Financial Crypto IRA 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.  Also, IRA Financial is working on a multi-signature solution that will allow the IRA holder control over their crypto private keys by gaining the ability to hold the IRA owned cryptos in a cold wallet.  

How Does the IRAFI-Gemini Crypto Solution work?

 

Advantages of the IRA Financial Crypto IRA-Gemini Solution

• Best and cheapest way to buy Bitcoin in an IRA or 401(k)
• Ability to control fees – Low Gemini trading fees
• Own Cryptos in the name of your IRA – no IRS headaches
• $300 flat IRA account fee –
• No asset value or transaction fees
• Trade 24/7 on your own directly through Gemini
• No broker fees
• No need for an LLC
• Control private keys
• Hold cryptos on or off exchange (cold wallet)
• Quick set-up

 Advantages of Investing with the IRA Financial Crypto IRA

The main advantage of using an IRA to purchase Bitcoin or other cryptocurrencies is to gain exposure to an emerging asset class and to be able to lock in any potential tax-deferred or tax-free gains in the case of a Roth IRA or Roth Solo 401(k).

Diversification:  With almost all retirement accounts being invested in equities, diversifying one’s retirement asset portfolio into other assets, such as real estate or even Bitcoin makes sense.  The idea is that you don’t want to put all your eggs in one basket.  Diversification experts suggest every IRA should have some exposure to assets other than equities. The issue is that not everyone has enough funds to buy real estate or invest in a hedge fund.  Thus, Bitcoin is an alternative asset that every retirement account holder can own in some capacity, which would offer a level of account diversification.

Risk vs. Reward: Bitcoin is very volatile but with that comes the potential for huge gains.  For example, Bitcoin was at $57,237 on December 1, 2021 and on January 10, 2022, was at approximately $41,800.  Bitcoin was up almost 72% in 2021 and Ethereum, the 2^nd most popular crypto, was up over 200% in 2021.  Having been investing in cryptos since 2016 and having taken the approach that risking a certain percentage of an IRA value on Bitcoin is like home run strategy.  It has worked out well for many clients and the huge upside potential of Bitcoin may be well worth the risk especially if you are only investing a small percentage of your overall IRA value.

Tax Advantages: Since most investors are looking to invest in cryptocurrency for the long-term and are not focused on using cryptocurrency or Bitcoin as a digital currency, using a Self-Directed Roth IRA to buy Bitcoin instead of personal savings makes a lot of tax sense. Plus, the long-term growth opportunities inherent in cryptocurrencies make it a complimentary investment for retirement accounts, which by nature are long-term investment accounts.

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 takes a distribution. Although, 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.

Below is the type of crypto IRA offered by self-directed IRA providers.

Crypto IRA Only: Some self-directed IRA providers only allow you to purchase cryptocurrency they work with in your IRA.  Meaning they do not allow you to make any other investment with your IRA other than the certain cryptos they work with.  I some cases, this may be only Bitcoin, where in other cases, it could be Bitcoin as well as a selection of other Ethereum backed coins.  In this type of crypto IRA, you cannot make other IRS approved alternative investments, such as real estate, private placements, investment funds, loans, etc.  Also, many of these crypto IRA providers have a minimum investment amount and also charge annual valuation fees as well as transaction fees.

Crypto IRA+: Self-directed IRAproviders such as IRA Financial, allow retirement investors to open a self-directed IRA to buy cryptos, plus also invest in any IRS approved alternative asset investment.  IRA Financial has partnered with Gemini cryptocurrency exchange to provide its clients with the easiest and most cost-effective way to start and fund a crypto IRA. IRA Financial is the first self-directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, 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 Gemini, one of the leading US cryptocurrencies exchanges.  The IRA Financial Crypto IRA+ 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.  Also, the IRA holder is 100% control over their private keys and can hold the cryptos in a cold wallet via a multi-signature solution.   In addition, IRA Financial has a flat annual fee of just $360 with no transaction fees, annual asset valuation fees, or wire or check fees.  The crypto IRA owner would be subject to a small Gemini fee on purchase, but will not be subject to any crypto holding fee.

Final Thoughts

Cryptocurrency investments can be risky and volatile.  However, for investors who wish to gain exposure to an emerging asset class, owning cryptos in an IRA or 401(k) makes tax sense.  The process for opening a Crypto IRA is getting easier and less costly every year.  For example, IRA Financial has an app that allows you to establish an IRA, fund it, and move the funds to an exchange all through the app. Plus, IRA Financial has a flat fee with no annual commission, IRA asset valuation fees, IRA transactions, or even check or wire fees.