What is Cryptocurrency?
Per IRS Revenue Ruling 2019-24:
- Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.
- Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
- Most popular cryptocurrencies: Bitcoin, Ethereum, and Litecoin
IRS View on Taxation of
- The IRS has issued guidance that cryptocurrency will be treated as property for federal tax purposes (see e.g. IRS Notice 2014-21).
- Outside of a retirement account: the income or gains from the sale of cryptocurrency will be subject to capital gains tax rates (short-term or long-term as applicable).
- Inside a retirement account: the gains/income derived from a cryptocurrency investment are tax-deferred (or potentially tax-free in the case of a IRA LLC account).
- Possible exception: If you invest your IRA LLC funds in mining cryptocurrency, the income generated may be subject to unrelated business income tax (UBIT) if the mining is considered an active trade or business.
Steps to Invest Self-directed IRA LLC
- STEP 1 – Open an IRA LLC
- Confirm that you have eligible rollover funds (former employer and/or IRA) and/or can make IRA contributions
- Choose a Self-directed IRA custodian/trust that allows for LLC investments
- Choose an IRA LLC provider with experience in helping others invest
- STEP 2 – Fund the IRA LLC
- Rollover Former employer plan or IRA funds and/or make IRA contributions to self-directed IRA
- Open a bank account in the name and EIN of the IRA LLC & invest self-directed IRA funds in IRA LLC
- STEP 3 – Open & Fund LLC Account at Cryptocurrency Exchange
- Open a Cryptocurrency Exchange Account in the name & EIN of the LLC owned by your IRA
- Transfer funds from the IRA LLC bank account to the account at the crypto exchange
- STEP 4 – Store Cryptocurrency
- Separate and segregated wallet exclusively for IRA LLC investments
- Store in safety deposit box associated with IRA LLC bank account
Investing IRA LLC funds in cryptocurrency
- Opening an Account at a Cryptocurrency Exchange
- Name and EIN of the LLC owned by your IRA (consider tax reporting by the exchange)
- Funding an Account at Cryptocurrency Exchange
- Confirm that the account can be funded with Fiat money
- Wire/ACH funds from a bank account in the name of the LLC owned by your IRA
- Do not fund from personal account per IRA LLC funding rules
- Private Transactions
- Confirm that the seller or buyer is not a disqualified person to ensure that you don’t commit a prohibited transaction
- Do not combine or “tie” the transaction with non-retirement transactions