Legality of Bitcoin Individual Retirement Account
A Bitcoin Individual Retirement Account can be purchased with your retirement funds. An IRS notice states that cryptocurrencies, such as bitcoin, shall be treated as property for federal income tax purposes.
The question then becomes, what is the best way to establish a Bitcoin Individual Retirement Account?
All IRA accounts must be held for investors by a bank, financial institution or state approved trust company. IRA Financial Trust is one such company.
What is a Self-Directed IRA?
A Self-Directed IRA is an individual retirement account that a custodian holds. It allows you to make broader and more diverse investments than allowable by traditional IRA custodians. For example, a bank. Self-Directed IRA custodians will allow investors to invest retirement funds in other types of assets such as real estate, promissory notes and even cryptocurrencies using a bitcoin individual retirement account.
Generally, you can purchase cryptocurrencies with an IRA two ways.
- The Bitcoin Individual Retirement Account Broker/Custodian Controlled approach
- The Wallet Control Bitcoin IRA LLC solution
Both structures have some advantages and disadvantages.
Bitcoin Individual Retirement Account Broker/Custodian Controlled
With this approach, the IRA investors must purchase the cryptocurrency through a broker associated with the Bitcoin IRA company. A bitcoin IRA investor opens a Self-Directed IRA account with a bitcoin IRA custodian.
The IRA investor will transfer or rollover his or her retirement funds tax-free to the new IRA custodian. The custodian will then transfer the funds to a broker who will purchase the bitcoin for the IRA investor.
Typically, you can purchase the bitcoin IRA by phone. The investor is limited to investing in the limited cryptocurrencies offered by the broker. Once the broker purchased the bitcoin IRA, it goes in a digital wallet. This typically requires multiple signature verification.
However, the IRA investor does not control the IRA wallet or the associated private key. Additionally, selling or exchanging the bitcoin IRA requires interaction with the broker and cannot occur online or after business hours.
Furthermore, there are commissions on each side of the transaction. Commissions can run as high as 25%.
- Very Hands-off
- No need to interact with cryptocurrency exchanges
- High fees – commissions can range from 15%-25% of IRA funds invested
- Lack of control over the cryptocurrency wallet
- No access to bitcoin IRA wallet private key
- Lack of ability to trade bitcoin IRA 24/7 which is how the cryptocurrency market operates
- All bitcoin IRA trades must go through the broker, which is typically done by phone and only during business hours
- IRA custodian fees are based on the value of the IRA assets invested
Wallet Control Bitcoin IRA LLC
With the Wallet Control Bitcoin IRA LLC, the IRA investor establishes an IRA account with a Self-Directed IRA custodian. The IRA investor then rolls over his or her retirement funds tax-free to the new custodian. The IRA assets then go to a newly established limited liability company (LLC). This is tax-free in exchange for 100% interest in the newly established LLC. The IRA will own the LLC, but the IRA holder manages it.
Since the IRA owns 100% of the LLC, it will be treated as a disregarded entity for tax purposes. Federal income tax return is not a requirement, and all income and gains from the cryptocurrency investment will flow back to the IRA without tax.
The IRA investor, as manager of the LLC, will then open a cryptocurrency exchange account at the exchange of their choice. The IRA holder then links the account to the IRA owned LLC bank account.
The IRA LLC funds is then wired to the cryptocurrency exchange account. Now, the IRA investor has the ability to invest in any cryptocurrency. The IRA holder also has the opportunity to trade the cryptos anytime.
IRA investors also have the ability to hold the cryptos purchased in a digital or hard wallet. He or she controls the IRA LLC as manager.
- Ability to invest in all cryptocurrencies
- Ability to control costs by selecting cryptocurrency exchange of your choice
- Ability to control cryptocurrency wallet – control over private key
- Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application
- Flat low annual IRA custodian fee – no asset valuation fees
- LLC set-up cost
- More involvement required by IRA investor
Whatever platform you decide to use, it is vital that you understand the financial risks. Bitcoin IRA investors should have the financial ability to bear the risks of a cryptocurrency investment. This includes a potential total loss of their investment. Cryptocurrency investments are uncertain and highly volatile. Any retirement account investor who has interest in using retirement funds to invest in cryptocurrencies should research and proceed with caution.