Last Updated on June 7, 2021
IRA Financial’s Pocket Bitcoin 401k will allow you to use your retirement funds to invest in all types of cryptocurrency directly from your mobile device or PC securely, and cost effectively.
IRA Financial has recently launched a new digital solution with Gemini Exchange, which will allow clients to buy and sell cryptocurrency directly through Gemini. This will eliminate the cost of high brokers and LLCs and offers a safer platform to perform crypto transactions. IRA Financial is the first Self-Directed IRA custodian that allows investors to buy and sell cryptos without a broker or LLC.
With the app, you no longer need a third-party 401k custodian involved in every aspect of your investment transaction.
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 solo 401(k) LLC should have a separate wallet, either online or offline, for the cryptocurrencies owned by the solo 401(k) LLC. The 401k 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 fail-safe 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.
IRA Financial Teams with Gemini Exchange
We have integrated with Gemini Exchange, a leading digital currency exchange and custodian, to allow investors to purchase cryptocurrency investments directly through our digital retirement app. The new integration enables investors to buy and sell crypto without the need of an LLC (Limited Liability Company) or third-party broker-firm.
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 exchange. Our new cryptocurrency solution is the first to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange.
Clients can now control their transaction costs by avoiding the need for costly LLCs and Brokers, but more importantly, trust Gemini as the licensed and qualified custodian of their cryptocurrency private key. It is our strong belief that the best and safest way to purchase Bitcoin and other cryptocurrency with IRA funds is with our digital solution. IRA Financial clients can perform transactions any time and will gain complete control over their cryptos.
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 Solo 401(k) 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 types of transactions. The foundation of the prohibited transaction rules is based on the premise that investments involving 401k and related parties are handled in a way that benefits the retirement account and not the 401k owner. The rules prohibit transactions between the 401k 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 401k holder, any ancestors or lineal descendants of the 401k holder, and entities in which the 401k 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 solo 401(k) to make cryptocurrency investments is tax advantageous because the tax on the interest payments can be deferred in the case of a pre-tax 401k or exempted permanently in the case of a Roth 401k.
In addition, solo 401(k) 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:
- A 401k uses a non-recourse 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, which is a maximum of 37% for 2019.
Therefore, if you plan to make Bitcoin or cryptocurrency investments using a solo 401(k) 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 401k, 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 401k funds, as manager of the Checkbook 401k LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account.
The Pocket Bitcoin 401k allows you to eliminate the delays associated with an 401k custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket Bitcoin 401k structure, all income and gains from 401k investments will generally flow back to your 401k LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401k, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the 401k 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 Use a Solo 401(k) to Invest in Cryptocurrencies
Unfortunately, none of the major financial institutions will allow you to use 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 Solo 401(k) to invest in bitcoin and other cryptocurrencies.
What is the Pocket Bitcoin 401k?
IRA Financial’s Pocket Bitcoin 401k is essentially a solo 401(k) with checkbook control. It 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 401k involves the establishment of a limited liability company (“LLC”) that is owned by the 401k (care of the 401k custodian) and managed by you or any third-party. As manager of the 401k LLC, you will have control over the 401k assets to make the investments you want and understand – not just investments forced upon you by Wall Street.
How it Works:
- Establish the solo 401(k) with IRA Financial Trust & Capital One online though our mobile app.
- Your 401k 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 Solo 401(k) 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 solo 401(k) 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 solo 401(k) 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. 401k Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the 401k as the sole member.
- You, as manager of the LLC, will then have checkbook control over all the assets/funds in the 401k LLC to make the real estate investment.
- Since the LLC is owned 100% by an 401k, 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 401k without tax.
With a Pocket Bitcoin 401k, 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 401k funds, as manager of the Checkbook 401k LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account. The Pocket Bitcoin 401k allows you to eliminate the delays associated with an 401k custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket Bitcoin 401k structure, all income and gains from 401k investments will generally flow back to your 401k LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401k, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the 401k LLC will flow-through to the 401k tax-free!
2020 Most Popular Cryptocurrency Investments
The following cryptocurrency investments have been popular with our solo 401(k) clients in 2019:
- Bitcoin Cash
- Binance Coin
2019 is proving to be a big year for cryptocurrency. The oldest and most well-known crypto coin, Bitcoin, has risen 200% in 2019 and at the time of writing this article, is valued at over $11,000. 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.
Did You Know?
A Solo 401k is not prohibited by the IRS from owning cryptocurrency since the IRS does not look at cryptocurrency, such as Bitcoin, or Ethereum, as currency, but instead considers it property, per IRS Notice 2014-21. This means that investing in cryptocurrency is permitted, along with investing in real estate, funds, and so much more. There are a number of opportunities you can choose from. Contact IRA Financial today for more information.
Self directed retirement plans are a great option for the solo entrepreneur, and more. We’re ready to assist you. Contact IRA Financial to establish the Pocket Bitcoin 401k directly at 800-472-0646 or fill out one of our contact forms to speak with a tax specialist.