Like cryptocurrencies, an Initial Coin Offering (“ICO”) is an allowable investment for retirement accounts.
What are ICOs?
An ICO is a fundraising instrument in which companies sell their underlying crypto tokens in exchange for cryptocurrency tokens, such as bitcoin and ether. It’s somewhat similar to an Initial Public Offering ( IPO) in which investors purchase shares of a company.
ICOs are a relatively new occurrence but have quickly become a dominant topic of discussion within the blockchain community. Many, including the SEC (Securities and Exchange Commission), view ICO projects as unregulated securities. To this end, the SEC is currently formulating plans to regulate the ICO marketplace. The Chairman of the SEC, Jay Clayton, has said that “ICOs can be effective” but that “securities law must be followed.”
Through the ICO fundraising model, startups can raise capital by issuing cryptocurrency on a blockchain — most commonly Ethereum — and distributing them to token buyers in exchange for making a financial contribution to the project. ICOs can be conveyed across the Ethereum network and traded on cryptocurrency exchanges. Additionally, ICOs can serve a number of different purposes, from granting holders access to a service provided by the ICO company to entitling them to company dividends. Depending on their function and purpose, cryptocurrency tokens may be classified as utility tokens or security tokens.
Utility tokens, also called “user tokens” or “app coins,” represent future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments. Nevertheless, there is a strong likelihood that the SEC may still treat utility tokens as securities. This is why it is strongly recommended that investors who purchase ICO or cryptocurrency with personal funds or a self-directed IRA must first register with the SEC.
If a cryptocurrency token derives its value from an external, tradable asset, it is classified as a security token and becomes subject to federal securities regulations. Most ICOs would likely be classified as security tokens.
At this stage, ICO investments can be quite risky. Many of the current ICOs are not regulated and there have been numerous cases of fraud. A fundamental issue with ICOs is the fact that most of them raise money pre-product. This makes the investment extremely speculative and risky.
ICOs and IRS Rules
The Internal Revenue Code does not describe what a Self-Directed IRA or Solo 401(k) Plan can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain type of transactions. Because the IRS treats cryptocurrencies, such as Bitcoin, as a capital asset (like stocks or real estate), IRA holders can buy, sell, or hold cryptocurrencies in their retirement account subject to the prohibited transaction rules found under Internal Revenue Code Section 4975(c).
The IRS tax treatment of virtual currency or ICOs creates a favorable tax environment for retirement account investors. When an IRA 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 12 months) or long-term (held greater than 12 months), the IRA does not pay tax on the transaction and tax will defer to the future when the retirement account holder takes a distribution.
Therefore, using a Self-Directed IRA to invest in ICOs could allow the investor to defer (or even eliminate in the case of a Roth) tax due from the investment. That is why many investors are looking to use retirement funds, especially a Roth IRA, to buy regulated ICOs.
How to Use a Self-Directed IRA to Buy ICOs
Below is a step-by-step breakdown of how to use a Self-Directed IRA to buy ICOs:
- Establish Self-Directed IRA LLC with IRA Financial Trust & Capital One Bank.
- Your IRA cash/assets can be roll over to IRA Financial Trust tax-free.
- The IRA assets will then be transferred to the LLC tax-free in exchange for 100% interest in the LLC.
- You, as manager of the LLC, will open a bank account for the LLC at any local bank. IRA Financial will draft LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
- As manager of the LLC, you will then have checkbook control over all the assets/funds in the IRA LLC to make the regulated ICO investment though any exchange.
- 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.
Learn More: Coinbase IRA
Why IRA Financial
IRA Financial Group & IRA Financial Trust Company has partnered to offer the Pocket ICO IRA solution. With IRA Financial Group’s Pocket ICO IRA solution, the IRA owner can purchase ICOs on any exchange or network on their own and without incurring high annual IRA custodian fees.
IRA Financial Group is a fast-growing financial technology company that offers digital solutions for alternative asset investments with retirement accounts. IRA Financial Group specializes in offering individuals and businesses Self-Directed IRA and other tax advantaged retirement accounts, such as 401(k) qualified retirement plans and digital solutions to directly connect retirement account investors to alternative asset investments.
IRA Financial Group has helped over 25,000 clients invest over $5 billion in retirement funds in alternative asset investments.
The tax environment for virtual currencies and ICOs is very favorable, however cryptocurrency and ICO investments are risky and highly volatile. Any investor interested in learning more about bitcoins should do their diligence and proceed with caution.
Related: How to Lower Your Crypto IRA Fees
Get in Touch
If you wish to learn more about ICOs and how to use the Self-Directed IRA LLC to make ICO investments, contact IRA Financial Group directly at 800-472-0646 and speak with an IRA specialist. You can also fill out the form above or on our contact page. We look forward to hearing from you.