IRA Financial’s Pocket Bitcoin IRA will allow you to use your retirement funds to invest in all types of cryptocurrencies, such as Bitcoin directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party IRA custodian involved in every aspect of your investment transaction. Make Bitcoin investments on your own directly from a mobile device or PC with IRA Financial’s Pocket IRA. Additionally, rollover, deposit, or transfer funds between your investment and IRA seamlessly and without delay.
Cryptocurrency is a form of digital money that is designed to be secure and, in many cases, anonymous. A primary reason that cryptocurrencies have become a popular investment class for investors around the world is the idea of gaining exposure to an emerging asset class. In addition, blockchain technology which is the main technology that powers cryptocurrency is expected by many to revolutionize the way financial transactions occur globally.
For many investors, there is a significant upside to investing in cryptocurrency. That is, the cryptocurrency market is still young, and many investors are projecting future prices that would make buying any of the major cryptocurrencies a good long-term investment. There is strong expectation of cryptocurrency being an important medium of exchange and store of value in the future.
Yes – the cryptocurrency market has been very volatile since its inception. The price of Bitcoin can swing up or down hundreds of dollars in a day, cryptocurrency is, despite all its risks, perhaps the most exciting asset of the 21st century. A decentralized digital currency that works on the very interesting and likely here-to-stay blockchain technology.
It is a currency associated with the internet that uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers.
The first cryptocurrency was bitcoin which was created in 2009 and is still the best known. There has been a proliferation of cryptocurrencies in the past decade and there are now more than 1,000 available on the internet. Bitcoin is now worth more than $11,000 as of December 2017.
Types of Cryptocurrency
Bitcoin has become the leader in shepherding in a wave of cryptocurrencies built on decentralized peer-to-peer networks and has become the primary standard for cryptocurrencies. The currencies inspired by Bitcoin are collectively called altcoins and have tried to present themselves as modified or improved versions of Bitcoin. While some of these currencies are easier to mine than Bitcoin, there are tradeoffs, including greater risk brought on by a degree of lesser liquidity, acceptance and value retention.
A Bitcoin holds a very simple data ledger file called a blockchain. Each blockchain is unique to each individual user and his/her personal bitcoin wallet.
All bitcoin transactions are logged and made available in a public ledger, helping ensure their authenticity and preventing fraud. This process helps to prevent transactions from being duplicated and people from copying bitcoins.
While every Bitcoin records the digital address of every wallet it touches, the bitcoin system does NOT record the names of the individuals who own wallets. In practical terms, this means that every bitcoin transaction is digitally confirmed but is completely anonymous at the same time. People cannot easily see your personal identity; however, they will be able to see the history of your bitcoin wallet.
How to Hold Cryptocurrencies owned by a Retirement Account
Cryptocurrencies are generally as secure as possessing physical precious metal. Just like holding a gold bar, a person who takes reasonable precautions will be safe from having their personal cache stolen by hackers.
A bitcoin wallet can be stored online (i.e. a cloud service) or offline (a hard drive or USB stick). The offline method is more hacker-resistant and absolutely recommended for anyone who owns more than 1 or 2 bitcoins, but it is not without risk. Your Pocket Bitcoin IRA should have a separate wallet, either online or offline, for the cryptocurrencies owned by the self-directed IRA LLC. The IRA LLC owned wallet should not hold any cryptos owned with non-retirement funds. In other words, a bitcoin wallet should not hold retirement account owned and personally owned cryptos.
More than hacker intrusion, the real loss risk with bitcoins revolves around not backing up your wallet with a failsafe copy. There is an important .dat file that is updated every time you receive or send bitcoins, so this .dat file should be copied and stored as a duplicate backup every day you do bitcoin transactions.
How are Cryptocurrencies Treated by the IRS?
Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoins and other cryptocurrency are not considered a “currency.” 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 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.”
In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, 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). 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.
Does the IRS Allow Retirement Accounts to Purchase Cryptocurrencies?
The Internal Revenue Code does not describe what a Self-Directed IRA 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. The foundation of the prohibited transaction rules is based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”.
The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.
Because the IRS treats cryptocurrencies, such as Bitcoins, as a capital asset, such as stocks or real estate, a retirement account is permitted to buy, sell, or hold cryptocurrencies in their retirement subject to the prohibited transaction rules found under Internal Revenue Code Section 4975(c).
The advantage of using retirement funds to invest into cryptocurrencies is that, in general, all the income and gains generated by the investment would not be subject to any tax or penalty. Instead of paying tax on the returns associated with the cryptocurrency investment, tax is paid at a later date, leaving the investment to grow unhindered. Using a self-directed IRA to make cryptocurrency investments is tax advantageous because the tax on the interest payments can be deferred in the case of a pre-tax IRA or exempted permanently in the case of a Roth IRA.
In addition, self-directed IRA investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
Unrelated Business Taxable Income
In general, almost all retirement account investments that generate passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.
The UBTI tax is only triggered if:
- Retirement account uses margin to buy stock
- Retirement account invests in an active business through a passthrough entity, such as an LLC
The UDFI tax is triggered if:
- An IRA uses a nonrecourse loan (real estate acquisition financing to purchase real estate)
- Exemption for 401(k) plans
- IRC 514(c)(9)
The UBTI & UDFI Trigger the Same Tax Rate
UBTI and UDFI trigger the same tax rate, which is a maximum of 37% for 2019. Therefore, if you plan to make Bitcoin or cryptocurrency investments using the Pocket Bitcoin IRA and the underlying investment will not involve an investment into a business operated via a passthrough entity, such as an LLC, will have debt or margin, the UBTI tax rules will likely not be triggered.
The good news is that your IRA Financial assigned specialists will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.
With a Pocket Bitcoin IRA, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your IRA funds, as manager of the Checkbook IRA LLC, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account. The Pocket Bitcoin IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
In addition, with the Pocket Bitcoin IRA structure, all income and gains from IRA investments will generally flow back to your IRA LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the IRA LLC will flow-through to the IRA tax-free!
You will be assigned to a specialist at IRA Financial who will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.
Why I Need a Self-Directed IRA to Invest in Cryptocurrencies
Unfortunately, none of the major financial institutions will allow you to use IRA or 401(k) plan funds to invest in cryptocurrencies or essentially anything outside of Wall Street. The reason for this is simple: banks do not make money when you invest in non-traditional equities, such as private equity or venture capital investments. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Self-Directed IRA to invest in bitcoin and other cryptocurrencies.
How Does the Pocket Bitcoin IRA Work?
IRA Financial’s Pocket Bitcoin IRA, also known as a self-directed IRA with checkbook control is an IRS approved structure that allows one to use his or her retirement funds to make cryptocurrency investments tax-free and without custodian consent. The Pocket Bitcoin IRA involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA custodian) and managed by you or any third-party. As manager of the IRA LLC, you will have control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.
- Establish the self-directed IRA with IRA Financial Trust & Capital One online though our mobile app.
- Your IRA cash/assets can be rolled over to IRA Financial Trust tax-free directly from our mobile app.
- The assets will be transferred to a new Self-Directed IRA plan checking account with Capital One Bank. Your assigned specialists will help you open a self-directed plan account with Capital One seamlessly and with no wiring fees or minimum balance requirement. Now you can establish a self-directed IRA with checkbook control and not visit a bank or deal with bank opening documentation. Our special partnership with Capital One Bank makes IRA Financial the only self-directed provider that can open a self-directed IRA plan bank account for our clients. This makes the process quick, easy, and cost-effective. As manager of the LLC, you will open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
- You, as manager of the LLC, will then have checkbook control over all the assets/funds in the IRA LLC to make the real estate investment.
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 will flow back to the IRA without tax.
With a Pocket Bitcoin IRA, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your IRA funds, as manager of the Checkbook IRA LLC, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account. The Pocket Bitcoin IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket Bitcoin IRA structure, all income and gains from IRA investments will generally flow back to your IRA LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the IRA LLC will flow-through to the IRA tax-free!
2019 Most Popular Cryptocurrency Investments
The following cryptocurrency investments have been popular with our self-directed IRA clients in 2019:
2019 is a big year for cryptocurrency. The oldest and most well-known crypto coin, Bitcoin, has risen 200% in 2019, and other cryptocurrency, such as Litecoin, are also performing well. Although there is potential for high gains, the crypto market is risky and volatile. Any retirement investor who is interested in using their Self-Directed IRA funds to purchase Bitcoin should understand virtual currency and its technology.
We’re here to assist you. Contact IRA Financial to establish the Pocket Bitcoin IRA directly at 800-472-0646. You can also fill out one of our contact forms to speak with a tax specialist.