One of the major elements of the Jobs and Tax Cut Act of 2017 was the reduction in the maximum corporate tax rate from 35% to 21%. The corporate tax reduction has been warmly received by corporate America. For retirement account investors looking to invest in cryptocurrency mining ventures, the maximum corporate tax rate reduction can also prove to be quite positive.
In general, as per IRS Notice 2014-21, cryptocurrency mining activities would generate business income and not capital gains. Accordingly, if one invests retirement funds in a mining business or venture that is set-up as a passthrough entity, such as an LLC, an additional tax called the unrelated business taxable income tax (UBTI) could apply.
In 2018, the Jobs and Tax Cut Act of 2017 reduced the maximum UBTI tax rate from 39.6 to 37%. However, the tax is now triggered with even just $1 of taxable unrelated income, whereas, in prior years, there was a $1,000 income threshold. In other words, if an IRA investor invested IRA funds into a cryptocurrency mining business that was operated via an LLC or other passthrough entity, the UBTI tax would be triggered and a tax of up to 37% would be imposed. As a side note, the IRS prohibited transaction rules prohibit the retirement account holder or any disqualified person from being actively involved as an employee of the cryptocurrency mining business. For individuals looking to use retirement funds to invest in a cryptocurrency mining business in which they will be personally involved, the rollover business start-up (“ROBS”) solution could be a viable option.
The primary way investors have tried to limit the reach of the UBTI tax is by employing a strategy known as a “C Corp Blocker.” The C Corp Blocker strategy involves the retirement account holder establishing a C Corporation and then investing the retirement funds into the C Corporation before the funds are ultimately invested into the planned investment. For example, if a retirement account investor is seeking to invest retirement funds into a mining business operated through an LLC, he or she can establish a C Corporation, invest her IRA funds through the C Corporation, and then have the C Corporation invest the funds into the mining LLC. All income received by the C Corporation would be subject to the new reduced corporate tax rate of 21%, which is less than the 37% maximum UBTI tax rate and less than the old maximum corporate tax rate of 35%.
Other than structuring the investment as a loan and not an equity investment, which would generate interest income not subject to the UBTI tax, an equity investment of retirement funds into an active mining business operated via an LLC will have some tax implications. However, employing a C Corp Blocker strategy can be helpful in blocking the UBTI tax from applying and minimizing the tax rate to a maximum tax rate of 21%, significantly less than the UBTI maximum tax rate of 37%.
Cryptocurrency mining investments are uncertain and highly volatile. Any retirement account investor interested in using retirement funds to invest in cryptocurrency mining activities should do their diligence and proceed with caution.