Can I earn interest on Crypto/Bitcoin in My Solo 401k/IRA?

Please check out our webinar where we review whether you can earn interest on cryptocurrency/bitcoin in a Solo 401k/IRA account

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. 
  • Popular cryptocurrencies:
    • Bitcoin
    • Ethereum
    • Litecoin

IRS View on Taxation of
 Cryptocurrency

  • 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 Roth Solo 401k account).
  • Possible exception: If you invest your IRA LLC/Solo 401k 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.

How to Earn Interest on Crypto/Bitcoin in IRA/Solo 401k

  • Often Marketed as a “Savings Account”
    • Gemini Earn
    • BitcoinIRA
    • BlockFi
  • Typically structured as a loan where the platform allows you to lend your cryptocurrency to certain institutional borrowers.
  • Much higher interest rates vs. true bank savings account or certificates of deposit

Will the IRS tax interest on Crypto/Bitcoin in My Solo 401k/IRA?

  • No clear guidance
  • Possible Implications of the “property” classification
  • May consider the transaction to be a “sale” since the same cryptocurrency is not returned (contrast with USD which is “fungible”)
    • Practically the gains are still tax-deferred
  • Unrelated Business Income Tax (UBIT)
    • Generally, rent from personal property is subject to (UBIT)
    • Could the interest paid be characterized as similar to “rent” paid on personal property

Additional Issues

  • Margin Loans (i.e. use cryptocurrency in you retirement account as collateral for a loan)
    • IRS: If the owner of an IRA pledges part of the IRA as collateral, the part of the IRA that is pledged is treated as distributed
  • Buy Cryptocurrency on Margin is likely subject to UDFI
    • It is established that purchase of securities on margin is subject to Unrelated Debt-Financed Income Tax
    • While cryptocurrency is considered “property”, the general UDFI exception for qualified retirement plans is limited to “real property”

What is a Solo IRA?

While the term “Solo IRA” is often used to  referred to a self-directed solo 401k,  the IRS does not recognize the term solo IRA to refer to a solo 401k plan. Instead the IRS, uses the following terms to refer to a 401k plan for the self-employed:

Visit Here to view the IRS page on solo 401k plans.

IRS Extends Contribution Deadline to May 17, 2021 for Self-Directed Solo 401k Year 2020 Contributions for Sole Proprietors and Independent Contractors

On March 17, 2021, the IRS announced the extension of the deadline for individuals to file their year 2020 federal income tax return.  The original due date was April 15, 2021. With the IRS automatic extension, the deadline is now May 17, 2021.  This extension to file later positively impacts solo 401k contributions for sole proprietors and independent contractors who file a Schedule C which is an attachment to the individuals personal Form 1040 tax return.

Slides: 2020 & 2021 Solo 401k Annual Contribution Deadline

Video: https://youtu.be/Yx3ay86xUDk

The solo 401k contribution deadline is generally driven by owner-only business tax return due date filing deadline.  As a result, sole proprietors and independent contractors are automatically granted this extension and do not have to file any extension forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

The solo 401k contribution deadline is generally driven by the self-employed business entity type.  As a result, sole proprietors  and independent contractors are automatically granted this extension and do not have to file any extension forms or call the IRS  to qualify for this automatic federal tax filing and payment relief.

“This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities,” said IRS Commissioner Chuck Rettig.” To view the IRS announcement, CLICK HERE, and to view the final Notice 2020-21 VISIT HERE.

Rookie SD 401k Real Estate Investment Questions

Looking to purchase a property with my SD 401K account funds. Since this will be my first time, want to make sure is done right.

  1. My wife is a real estate agent and was wondering if since commission paid is taxed, although comes from my Solo 401K to purchase, would she be able to collect commission?

ANSWER:

This confirms that your spouse may not receive a commission on account of the purchase of real estate buy your solo 401k.

  1. If there is a gain when selling, goes right back into tax deferred Solo 401K and is not reported as capital gain, correct?

ANSWER:

This confirms that the gains on the later sale of the property must flow back to the solo 401k and will do so on a tax-deferred basis (i.e. no capital gains).

  1. Do we need to fill out a form and send to you as the custodian?

ANSWER:

This confirms that we are not the custodian of your solo 401k. Instead, you hold the documents related to solo 401k investments as the trustee of the solo 401k.

Please see more information below:

Your Solo 401k can invest in real estate subject to the following requirements:

  • Real estate investment procedures: https://www.mysolo401k.net/solo-401k/solo-401k-real-estate-investment-procedure/
  • Please keep in mind that you can’t work on the property yourself and if you do a high volume a fix and flips (e.g. more than 2 per year) the IRS may attempt to tax as a business (Unrelated Business Income Tax).
  • The property must be purchased from an unrelated person and then sold to an unrelated person.
  • You can’t lease the real estate owned by the Solo 401k to you or any other related persons.

The National Compensation Survey (NCS) Survey: 67 percent of private industry workers had access to retirement plans in 2020

  • The U. S. Bureau of Labor Statistics (BLS) conducted an employee benefits survey and found that as of March 2020 Sixty-seven percent of private industry workers had access to retirement plans in 2020. 

Fifty-two percent had access only to defined contribution retirement plans.

12 percent had access to both defined benefit and defined contribution retirement plans.

3 percent had access only to defined benefit retirement plans.

Full-time workers were more likely than part-time workers to have access to any type of retirement plan.

Overview

The National Compensation Survey (NCS) provides comprehensive measures of compensation cost trends and the coverage, costs, and provisions of employer-sponsored benefits in the United States. This bulletin presents 2020 estimates of the incidence and key provisions of employer-sponsored benefits for civilian workers, private industry workers, as well as state and local government workers by worker and establishment characteristics.

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