Last Updated on January 22, 2021
Bitcoin is defined as digital money within a decentralized peer-to-peer payment network. Bitcoin has no corresponding physical element, like coins or paper bills (despite the popular image of an actual coin). It’s become increasingly popular to invest in Bitcoin and other cryptos. An IRA might be the best way to invest. However, can you actually hold Bitcoin in a cold wallet in an IRA?
- Bitcoin has become the hottest emerging asset
- Investing in Bitcoin with IRA is extremely tax-efficient
- Cold wallets can be used with an IRA to invest
Legality of Owning Bitcoin in a Retirement Account
Even though Bitcoin is labeled as a “cryptocurrency,” from a federal income tax standpoint, Bitcoin 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. 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.” Therefore, since the IRS treats Bitcoin as property, like stocks or real estate, an IRA or any retirement account is permitted to invest in Bitcoin or any other cryptocurrency.
How to Hold Bitcoin
In general, one has a few options to hold cryptocurrencies in an IRA. Here are the most common ways to do so.
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. It is generally easier to engage in cryptocurrency transactions with a hot wallet since you are already connected to the internet. However, there is a greater chance of theft with a hot wallet versus a cold wallet. They can be mobile, desktop, or online For example, if you hold Bitcoin or other cryptos on an exchange you are using a hot wallet.
In general, a cold wallet is a tool that stores Bitcoin and other cryptocurrencies offline. Storing Bitcoin offline in a cold wallet reduces the threat of their abduction by hackers. Cold storage is less convenient than other methods of protection, so often, a certain amount is stored online for related use, while the bulk of the money is placed on a cold storage device. This makes it easier to access coins for everyday use. Cold wallets are generally offline or paper. A popular cold wallet is a Trezor.
Holding Gold in an IRA
Internal Revenue Code (“IRC”) Section 408(m), identifies the types of precious metals that are approved for retirement account investments. In general, the precious metals must be of bullion quality, which includes gold, silver, palladium, and any coins, including American Eagle and state minted. In addition, IRC Section 408(m) is clear that one can only hold IRS approved precious metals at a depository or U.S. bank. In other words, once cannot hold IRS approved precious metals or bullion coins at home or anywhere that is not a depository or U.S. bank.
Physical Possession Requirement & Cryptos
Under IRC Section 408(m), the “physical possession” requirement only applies to gold and other IRS-approved precious metals. It does not apply to property or any other asset type. Accordingly, cryptos are not treated as precious metals or bullion coins and, thus, can be held in a cold wallet in one’s home or personal possession.
It is clear that one is permitted to hold cryptos on a hot wallet, but some debated whether a “physical possession” requirement applied to cryptocurrencies. Based on IRC 408(m), it is clear that since a cryptocurrency is not treated as a bullion metal or coin, one can hold cryptos, such as Bitcoin, in a cold wallet, which can be stored anywhere. Please make sure to keep the wallet safe and make sure you remember the password. However, it is also important to remember that the IRS prohibited transactions prevent any retirement account holder from gaining any personal benefit from any retirement account asset, including using a cryptocurrency for any personal use or benefit.
Beat way to Buy Bitcoin in an IRA or 401(k)
In this model, the individual would open an IRA with a Self-Directed IRA custodian and then the custodian would work with a crypto exchange to have the account opened in the name of the IRA. I have worked for a few years to finally convince a crypto exchange that this model makes the most sense for the individual investor. IRA Financial partnered with Gemini Exchange to allow individuals to control their own crypto exchange account as the IRA owner, without the need of an LLC or broker. The crypto account is titled in the name of the IRA. Thus, IRA Financial will custody the IRA and Gemini will custody the crypto. This model is the future of how individual IRA owners will buy Bitcoin in a retirement account because it is the least costly.
- Total control over private key
- Ability to control fees – can select exchange of your choice
- Trade 24/7
- No need for a broker or LLC
- No IRS reporting issues since account is titled in name of an IRA
- Can hold cryptos on the exchange or in cold wallet (offline)
Of course, there is more personal involvement when using a cold wallet. But, if you feel more secure keeping the bulk of your investments in one, it’s totally acceptable.
If you have any questions about using a cold wallet for your Bitcoin IRA investments, please contact us @ 800.472.0646.