Investing in Cryptocurrencies within a Self-Directed Solo 401(k)
One way to increase diversification in your retirement account is by investing in cryptocurrency, such as Bitcoin, in your self-directed solo 401(k). There are a number of advantages to doing this, but there are also rules to keep in mind.
Does the IRS allow for cryptocurrencies in self-directed solo 401(k) retirement accounts
The IRS does not provide a list of assets that a solo 401(k) can invest in. Instead, they list what it cannot invest in, such as collectibles and art, and that the plan cannot engage in prohibited transactions or with a disqualified person. Since cryptocurrencies are not on the ‘cannot invest’ list, they are allowed in self-directed solo 401(k) retirement accounts, and any type can be used, such as Bitcoins, Litecoin, Zcash, Dash, Ethereum, Ethereum Classic, Monero, and Ripple.
Benefits for holding cryptocurrencies in a self-directed solo 401(k)
• Gains are tax deferred.
• There is no time limit for holding property, so there is no need to worry about the 12-month holding period for long term capital gains tax.
• Potential for a greater rate of return on invested capital.
• Invest in what you like and understand.
• Increased diversification in your retirement portfolio.
• Inherent investment privacy.
How are cryptocurrencies owned by a self-directed solo 401(k) account
The self-directed 401(k) plan should have an account with a separate wallet, either online or offline, for the cryptocurrencies owned by the plan. The plan-owned wallet should not hold any cryptos purchased with non-retirement funds. Meaning, a Bitcoin wallet should not hold personally-owned cryptos in the retirement account/wallet. Along with the risk of hacker intrusion, the real risk of loss with Bitcoins, for example, revolves around not backing up the wallet with a failsafe copy, so the .dat file that is updated every time a Bitcoin is sent or received should be copied and stored as a duplicate backup every day that there is a Bitcoin transaction.
Steps to take when purchasing cryptocurrencies, such as Bitcoins, Litecoins, Ethereum, or Ethereum Classic, with a self-directed solo 401(k).
1. Once the plan’s account is established and funded with either contributions and/or a rollover from an old pre-tax retirement account, the account holder acts as trustee which will allow for “checkbook control” over all the assets/funds in the solo 401(k).
2. The self-directed solo 401(k) allows for two options when opening a cryptocurrency exchange account:
a. Open the account at a cryptocurrency exchange, such as Gemeni, in name of the self-directed solo 401(k) plan. (Nashional Self-Directed will provide you with all the necessary solo 401(k) plan documentation to open the account, including an EIN for the plan.) Or,
b. Establish a special purpose LLC that would be owned 100% by the solo 401(k) plan. Then, open the cryptocurrency account with the exchange of your choice in the name of the LLC.
3. Once the account is opened via option a, or b, you can link your bank account with the newly established crypto exchange account and fund it.
Tips When Purchasing Cryptocurrencies with Retirement Funds
• Do not comingle personal funds with retirement funds to purchase the cryptocurrencies.
• Ensure that the cryptocurrency exchange account is opened in the name of the solo 401(k) plan, or a special purpose LLC, if applicable.
• Do not comingle personally held (or any other disqualified person-held) cryptocurrencies in your retirement account’s wallet.
• Be sure to link your solo 401(k) (or special purpose LLC) account, not a personal account, to the account at the exchange.
• Ensure that all income/gains or losses flow from the exchange account directly to the self-directed solo 401(k) account.
• Be sure to follow all prohibited transaction rules.
• Avoid “mining” cryptos in the solo 401(k) because the income generated from it could be subject to UBIT tax.
• Understand and weigh the risks and rewards involved in using a retirement account to invest in cryptocurrencies.
Cryptocurrencies are highly volatile and investing in them can be very risky. Anyone interested in investing in this asset class should do their diligence and proceed with caution.
*Nashional Self-Directed does not provide investment advice and this article should not be interpreted as an endorsement for investing in cryptocurrencies.