Investing Solo 401k in Cryptocurrency and Bitcoin

The IRS has issued guidance that bitcoin / cryptocurrency will be treated as property for federal tax purposes (e.g. IRS Notice 2014-21). As a result, investing retirement accounts such as solo 401k plans and self-directed IRAs has increased in popularity since the IRS guidance was released in 2014. 
  • Learn more about latest announcement that Fidelity will offer Bitcoin 401k plans and how to open a Crypto Solo 401k at Fidelity – CLICK HERE

Cryptocurrency Falls Under Alternative Investment Type

Similar to investing retirement funds in other alternative investments like real estate and precious metals, for example, it is important to ensure that proper record-keeping and other rules applicable to solo 401k investments are followed when investing in cryptocurrency / bitcoin. 


Items to Consider When Investing in Cryptocurrency / Bitcoin

Online Exchange: Not all companies support Trust accounts. If they do, sometimes the registration process calls it an Entity account. You will need to open the account using the EIN of the solo 401k Trust. Naming convention will be the solo 401k Trust name. Using the solo 401k Trust information to register for a new account is very important because Coinbase, for example, will report a 1099-K. Here is their criteria.

We have clients that have established individual accounts at Coinbase and then linked the account to their Solo 401k bank account. Please keep in mind that (i) no non-retirement funds should be deposited into the account; and (ii) if both business partners or spouses are participating in the solo 401k plan, both business partners or spouses need to keep their funds in separate accounts.

Bank Account for Making the Investment:  Based on experience with clients who want to invest in cryptocurrency / bitcoin, you would need to setup a bank account for the solo 401k trust for the main purpose of linking the Trust bank account to the online exchange for ease of transferring funds to and from the online exchange account. Brokerage accounts for retirement accounts like a solo 401k trust have restrictions that limits you from transferring funds to the cryptocurrency exchange easily. 

The rules allow for multiple holding accounts for the solo 401k Trust, so if you would like to proceed with a bank account and maintain a brokerage account at Fidelity Investments, for example, then that is fine.  
  • Funding the account:
    • some providers don’t allow for FIAT money (US dollars) to be transferred to the account
    • If you have an existing “Non-Prototype”  brokerage account at Fidelity for the solo 401k that you opened with us, Fidelity won’t allow for ACH, but  the funds can be wired from the Fidelity “Non-Prototype” brokerage account. Please let us know and we can assist in filling out the wire directive.
  • Mining:
    • mining equipment must be in the name of the Solo 401k
    • please note that this could subject the income generated from the mining to unrelated business income tax if the mining is deemed to constitute a trade or business.
  • Wallet:
    • Wallet must be in the name of the Solo 401k
  • Multiple accounts:
    • just like other accounts, need separate account for Spouse, Roth 401k funds, etc.

Additional Information

Using Coinbase 

Using Gemini

Transfer Personally Owned Crypto QUESTION:

If I create a solo 401k, can I transfer cryptos I already own into it?

No as the rules do not allow for a transfer of an asset that you already own to a solo 401(k) plan. This would be considered a prohibited transaction.

Prohibited Transaction QUESTION:

I’m still waiting for Coinbase or Gemini to open my cryptocurrency trust account. Do you know if it’s possible to fund it with a transfer in-kind of bitcoin from my personal account instead of transferring cash to my bank account associated with the solo 401k trust account and purchasing tokens? I have a position of BTC in my personal account that I can send to my btc wallet in my trust account, so can I do this?

Good question. However, no, as such a transaction would result in a prohibited transaction. The solo 401k rules do not allow for the exchange of a personally owned asset (in this case the cryptocurrency) to a solo 401k plan. 

Invest in Cryptocurrency Off Main Exchange QUESTION:

Is it possible to invest in crypto off the main exchanges? If I transfer in USD to Kraken or Gemini, and then transfer it to my wallet so I can buy crypto on a decentralized exchange like Gate or trader joe in coins not listed on those exchanges, is this ok, as long as I keep meticulous records?

The solo 401k regulations don’t prohibit investing solo 401k funds cryptocurrency via “decentralized finance” (i.e. where one would buy and sell cryptocurrency outside of an exchange account) provided that:

·         The cryptocurrency is bought (and sold) from (to) an unrelated person where the sale is documented in the name of the solo 401k; and
·         The cryptocurrency is stored in a physical wallet in a safety deposit box associated with the bank account in the name of the solo 401k.

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About George Blower

I have the privilege of educating our clients about our products and services so that they can make informed and confident decisions about their financial future. Prior to joining My Solo 401k Financial, I served as the general counsel for a subsidiary of a Fortune 500 financial services company. Learn more about George Blower and My Solo 401k Financial >>


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