Cryptocurrency FAQs

Cryptocurrency is a newer asset class and thus creates a few common questions.

• We have instructions for Kraken, Gemini, Coinbase, ErisX, & River Financial You can use any exchange, but it MUST take your registration of your IRA LLC or Solo 401(k) trust. Without that entity registration, assets cannot be properly connected to your retirement account. Exchanges may need at least 1-2 weeks to open an account and will need significantly longer timelines to open an account when crypto interest is high.

• You are free to use other exchanges, but Rocket Dollar cannot provide any direct guidance on their application process. The exchange must have an ENTITY/corporate/institutional signup that is able to accept signup of your IRA LLC or Solo 401(k) Trust. A properly filled-out W9 should be addressed during onboarding.

  If you open an account without proper entity documentation, it could become harder to prove that the account was connected to your IRA and not personal cryptocurrency, leading to significant tax issues.

  If the exchange does not review a W-9 or acknowledge that your account has different tax reporting needs, there could be some initial confusion under tax review that the LLC is seen properly as a disregarded entity inside of a retirement account, and increase the risk of audit. 

• When customers desire to individually trade-specific cryptocurrencies, Rocket Dollar uses an IRA LLC model, also called a checkbook control model. This means as the LLC manager, you are in control of selecting your exchange and crypto-wallets.

  

  

  You can read our general structure and process article here.

• If both accounts are properly registered to your retirement account entity, it is fine to move them between exchanges. Just make sure to report properly on account values on both of them on your Rocket Dollar Dashboard Investment Tracker and in turn the IRS Form 5498 that Rocket Dollar helps you complete.

• Rocket Dollar is not currently supporting any in-kind transfers for Cryptocurrency. All Cryptocurrency or IRA funds must be sold to fiat retirement cash before it comes over to Rocket Dollar or, after trading and swapping many different cryptos, an investor decides they would like roll their entire IRA to another provider. Rocket Dollar's main goal is to increase the level of technology adoption when it comes to IRA investments, and unfortunately, many IRA custodians are not currently at a level that you would want to handle crypto wallet key transactions, which could lead to catastrophic loss of assets if an error was committed during a transfer. Rocket Dollar will revisit this in future plans to bring in-kind transfers and new crypto product integrations. 

• All activity must be credited to the IRA LLC or one wallet you could prove was for your retirement account. If you conduct a transaction or activity that you cannot prove activity or a wallet is from your IRA or IRA LLC, you could be subject to penalties or fines. Be aware that even though there are blockchain records, much of decentralized cryptocurrency and wallets are anonymous and do not collect personally identifying or entity information. 

• You can purchase Bitcoin or Ethereum on an exchange and use it to exchange for the coin or token you are targeting. It is important that all valuing entering cryptocurrency is attributed to your IRA LLC. If you purchase a cryptocurrency with IRA funds, it is your responsibility to prove ownership from your IRA LLC. Be aware that many altcoin platforms gather very little personal information, and some have no ability to properly register an institutional account for an IRA LLC.

• Review our article here.

  Webinar with Rocket Dollar, Regiment, and EA Matthew Metras on Crypto Taxes and IRAs

  Webinar with exchange ErisX - Crypto for Self Directed IRAs

• Contributing Crypto directly into a retirement account as an IRS prohibited transaction. This crypto is personal property and must be sold, all IRS contributions must be made in fiat, and then you can purchase cryptocurrency. There is no current tax-compliant mechanism to get cryptocurrency straight into an IRA. All contributions you make to the IRS must be properly categorized so that you could back them up during an audit.

• All staking interest must be credited to the IRA. All staking infrastructure must not cross over with personal staking assets or infrastructure. Personally pocketing rewards or interest instead of returning gains to your retirement account would be a prohibited transaction. Doing staking or mining through an active more hands-on arrangement could increase the risk of UBIT tax. Using an at-home computer rig is a much higher prohibited transaction risk than using a service, like Lido or Rocket Pool (unaffiliated with Rocket Dollar) to handle staking rewards for you. All tax implications for this asset class must be handled by the investor as Rocket Dollar cannot provide tax advice.

  Defi Staking Applications do not take KYC (know your customer) or entity information, meaning they have little to no tax reporting to assist you under audit other than the blockchain.

  All loans or credit to an IRA must only be from a non-recourse loan. This means that all loaning agreements must be non-recourse, and NO margin agreements should be signed or extended to the IRA. Luckily, most crypto platforms operate on non-recourse loans, where they would only take your crypto coins if you were not able to pay... however taking out a collateralized line for IRA capital can greatly increase the complexity of your taxes, as all non-recourse loans can create UBIT taxes in IRAs. Pocketing any collateralized short-term loan money and taking it for personal use it prohibited. Considering how much simpler it is to get staking rewards or interest with crypto in an IRA, asking a crypto provider for a loan in an IRA is unnecessarily complex and should be avoided by all unless they havefully studied and understand the impact of UBIT taxes.

• If the IRS feels a customer has committed a prohibited transaction, they can order a distribution of your IRA, which meals all dollars will lose their tax-advantaged status and possible early distribution penalties. There are some basic rules call self-dealing (do not do any business with your personal finances, personal crypto accounts, and your IRA) and prohibited persons (do not do any business with your children, spouse, parents, or grandparents) to know.

  You can read more here about common prohibited transactions related to crypto here.

• Yes. Mining is popular in the Bitcoin Cryptocurrency community. Over time, it has become more professional as it becomes more difficult and is often handled by professional services that help investors manage mining machines and power needs. You should be aware of UBIT, or unrealized business income tax. The IRS can tax crypto mining activity as a hobbyist or as a business activity. UBIT is taxed at the Trust tax rates, which are higher than the individual tax rates. UBIT requires the IRA or Solo 401(k) to file a tax return on IRS form 990-T. If the IRS sees your mining activity as business activity, you could be subject to UBIT.

  When a mining rig is running at your home or on your own power bill, it becomes almost impossible to keep your investment at "arms-length" and at high risk of a prohibited transaction like self-dealing. This could cause your IRA to be distributed. Some services handle mining and power costs for the investor, which heavily decreases prohibited transaction risk as you are not responsible for touching or maintaining the Bitcoin mining machine your IRA owns.

  Solo 401(k)s are not exempt from all types of UBIT, as there are eight types. Solo 401(k)s are exempt from Unrealized Debt-financed Income (UDFI), but mining will trigger a different type of UBIT, not debt-related UDFI.

  Passive investments are less likely to be subject to UBIT.

  You will need to review questions with a CPA.

• You can, but be aware of the $800 yearly franchise board tax fee for using an LLC. You can avoid it if you qualify for a Solo 401(k), which uses a trust. Rocket Dollar is hard at work looking for options and partners to solve this issue.

• No, under no circumstances. Taking personal perks is a clear prohibited transaction, and only your IRA can benefit from IRA investments. It would be fine to seek out lower transaction fees for bigger IRA investments, but not perks you use personally.

• Many popular NFTs are digital collectibles (Bored Apes, Cool Cats, Azuki, etc). The IRS has long disallowed collectibles in retirement accounts, and any collectible investment puts an IRA at definite risk of a prohibited transaction and should be avoided at all costs.  As of March 21st, 2023, the IRS has released a statement that new tax guidance is coming soon, and that some NFTS are digital collectibles. IRAs and the collectibles rule 408(m) is directly mentioned, meaning the IRS is considering IRA investors with this guidance. Some common examples of other collectibles the IRS enforces are fine rugs, diamonds, gems, artwork, classic cars, and baseball cards. If the NFT you want to target is not serving a utility, or a financial right, and holds value only because it is "cool," "desirable," or a favorite of a community, it will almost certainly be grounds for penalties or an IRA distribution.

  The IRS can bring enforcement on any investment that is not "held at arm's length" or could be abused by the investor themselves, such as buying a classic car, artwork, or NFT in a retirement account and then showing it off to personal friends or putting it up in their personal residence or social media.