Ethereum

Ethereum, launched in 2015, is now the second most traded cryptocurrency in the world. More than just being another cryptocurrency, it’s a decentralized software platform that enables Smart Contacts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. Ethereum on its platform-specific cryptographic token, commonly known as Ether. Ether works like a vehicle, moving funds around on the Ethereum platform. It is highly desired by developers who want to develop and run applications inside Ethereum. According to Ethereum, Ether can codify, decentralize, secure and trade just about anything.

The Ethereum Merger

The way Ethereum fundamentally works has changed. Since 2020, there have been two versions of Ethereum running in parallel. One has used the traditional method of recording transactions, while the other relied on a new method. Late this year, the two versions merged into one, adopting a new record-keeping paradigm.

In September 2022, Ethereum switched from requiring highly energy-intensive technology to mine it to a more sustainable system in a major update called “the merge.”

This technological overhaul of the world’s second-most valuable cryptocurrency by market cap was years in the making, and it didn’t take anyone by surprise. That being said, change breeds uncertainty and uncertainty can roil markets.

With the implementation of the Merge, blocks of new transactions went from being verified by computers solving massively difficult math problems to a system that uses financial incentives and penalties to accomplish the same task. This change is estimated to reduce the network’s power consumption by more than 99.95%.

But this change goes far beyond power saving. Mainnet, the original blockchain used since Ethereum’s inception in 2015, used a system called proof-of-work to securely transmit new transactions and other information. Proof-of-work requires user computers to solve incredibly difficult computations before being allowed to add a new block, thereby earning crypto rewards.

This method, commonly known as mining, is required by most cryptocurrencies, including Bitcoin. Mining is secure, but it’s also energy intensive. Before the Merge, Ethereum network consumed as much energy as some countries.

Proof-of-stake is an alternative that consumes less energy. Instead of devoting electricity, which fuels computing power, users themselves become part of the verification process by putting their own personal cryptocurrency on the line in a process called staking.

These users, called validators, are randomly selected to verify new information to be added to a block. They receive cryptocurrency if they confirm accurate information. If they act dishonestly, they stand to lose their stake.

How to Hold Ethereum owned by a Retirement Account

Cryptocurrencies, such as Ethereum, 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 wallet to store Ethereum can be held in an online crypto wallet like a cloud service, or offline, as in a hard drive or USB stick. The offline method is more hacker-resistant and absolutely recommended for anyone who owns more than a few crypto coins, but it is not without its own set of risks. Your Self-Directed IRA LLC 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 never hold any cryptocurrency purchased with non-retirement funds. In other words, an Ethereum wallet should never commingle retirement and personally owned cryptos.

The following are the most popular Ethereum wallets:

(i) Metamask, (ii) Ledger Nano X, (iii) Ledger Nano S, and (iv) Trezor.

The IRS Allows Retirement Accounts to Purchase Ethereum

There are only three restrictions on what a self-directed IRA can do. In essence, you are only prohibited from purchasing life insurance, collectibles, or performing any direct and/or indirect prohibited transactions under Internal Revenue Code Section 4975(c). Because the IRS treats cryptocurrencies the same as any other capital asset, a retirement account can legally buy, sell, or hold cryptocurrencies.

Below is a breakdown of the various types of crypto IRA solutions and the corresponding crypto exchange options available.

Crypto IRA LLC

Most crypto exchanges do not directly offer the ability to open an IRA. However, the only legal way to purchase cryptocurrencies, such as Ethereum, is through a regulated crypto exchange. One popular way to purchase cryptocurrencies for retirement planning is through the use of an LLC that is wholly owned by an IRA. By opening a crypto IRA through an LLC, the IRA owner can essentially use any cryptocurrency exchange they wish to buy and sell cryptos.  In addition, using a crypto IRA LLC solution will allow the IRA owner to hold the crypto private key on a cold wallet. 

In light of the FTX meltdown, holding your own private crypto key has become almost a necessity from a security standpoint. This reality has become especially important when one owns cryptos in a retirement account. Moreover, using a Crypto IRA LLC solution allows a participant to open a foreign crypto exchange account, which opens the door to the purchase of XRP and other cryptos not be available in the United States.  In light of FTX, foreign exchanges should be considered especially risky.

How this works –

1. The first step is to open an IRA account at through IRA Financial, a regulated self-directed IRA trust company.
2. The IRA must be designed to own 100% of the LLC, with the IRA owner serving as manager of the LLC.
3. In the role of the LLC manager, the participant opens an account with a respected crypto exchange
4. The LLC’s bank account gets linked to the crypto exchange account.
5. This provides the IRA owner with total control over the crypto account, allowing the owner to hold cryptos on the exchange or pull cryptos off the exchange, as well as the ability to store them in a cold wallet.

Some potential benefits to the use of a Self-Directed IRA LLC for Ethereum and other cryptocurrency investments

• Gains are tax-free.
• There is no time limit for holding property, meaning there is no need to concern yourself with the 12-month holding period for long term capital gain treatment.
• Potential to earn a larger rate of return on invested capital.
• Your retirement portfolio is more diversified, protecting your investments from over-exposure to Wall Street.
• Offers protection for your retirement funds from inflation or a falling U.S. dollar.
• Your investments will be anonymous and private.

Crypto IRA Direct

We are very proud to have the industry’s premier solution for buying Ethereum and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first self-directed IRA company to allow their clients to invest in cryptocurrencies, directly via an 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 Bitstamp, one of the leading US cryptocurrency exchanges. Bitstamp was founded in 2011 and has a strong presence in more than 100 countries, with physical offices in the UK, Luxembourg, the USA, Singapore, and Slovenia. In all, Bitstamp caters to more than 4 million customers around the globe.

IRA Financial is the first company with a legal system allowing retirement holders to hold cryptocurrencies in an IRA directly on an exchange.  This type of account is in the name of the IRA itself but is controlled directly by you as the authorized representative.  The primary benefit is that the IRA holder has 100% control over the account and can trade anytime. 

How Does the IRAFI-Bitstamp Crypto Solution Work?

Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.

Step 2: Move IRA or 401(k) funds to new IRA Financial account, tax-free.

Step 3: Funds are then transferred From IRA Financial to the Bitstamp cryptocurrency exchange.

Step 4: Finally, you can start buying and selling cryptos on your own without the need for any broker or the use of an LLC, all from the convenience of the IRA Financial app.

With this Crypto IRA direct solution, you control the purchase and sale of the cryptocurrencies) yourself. In other words, you do not need a costly broker or LLC to facilitate any transaction. In addition, the cryptos will be held in the name of the IRA custodian making everything cleaner from a tax reporting perspective.

Advantages

• No requirement to use broker.
• No requirement to use LLC.
• Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application.
• Low, annual flat rate IRA custodian fee, without any asset valuation fees.

Disadvantages

• Limited to only the most popular cryptocurrencies.
• The cryptos must be held on the Bitstamp exchange.

Contact Us

Before investing in Ethereum, it’s important to know that the cryptocurrency market is risky and highly volatile. It is important to learn what you can about virtual currency and its blockchain technology before investing.

Learn more about using a self-directed IRA for Ethereum investments by contacting IRA Financial Group directly at 800-472-0646. In the alternative, you can speak to one of our IRA specialists by quickly filling out our contact form. We look forward to hearing from you!