Cryptocurrency FAQs

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

• Rocket Dollar has an affiliate program where the crypto keys are held through the industry-leading crypto security firm. You can inquire at info@rocketdollar.com or 855-762-5383, and more details will come in 2024. Many clients inquire about securing their own cryptocurrency keys, hardware wallets, multi-sig, and decentralized finance. Those clients MUST purchase a Gold account and our Checkbook IRA product unless they are eligible for a Solo 401(k), which can be purchased as a Silver or a Gold Account. The Checkbook IRA Trust or Solo 401(k) Trust Trustee (you as the investor) can then pick the key or security model that best fits your needs. You can read more here.

• We have instructions for Kraken, Gemini, ErisX, & River Financial. Rocket Dollar customers cannot use Coinbase at this time. You can use any other exchange, but it MUST take your registration of your IRA Trust or Solo 401(k) trust. Some older clients of Rocket Dollar also have an IRA LLC. 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 can accept signup of your IRA LLC or Solo 401(k) Trust. A properly filled-out W-9 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 and an increased risk of audit. The exchange may or may not send automatically generated tax reports indicating tax should be paid, and exchanges are frequently audited to increase cryptocurrency tax compliance.

• When customers desire to individually trade-specific cryptocurrencies and also want flexibility on how they hold their cryptocurrencies, Rocket Dollar uses an IRA Trust model, also called a checkbook control model. This means as the trustee, you are in control of selecting your exchange and crypto-wallets. Older clients have a Colorado LLC.

  

  

  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. These transfers have challenges on crypto transaction movement, and IRA tax compliance and reporting. All cryptocurrency or IRA funds must be sold to fiat retirement cash before they come over to Rocket Dollar, or after an investor decides they would like to 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 Checkbook IRA Trust or LLC, Solo 401(k) Trust, 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, 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, Ethereum, or a stablecoin (for example, USDC) on an exchange and use it to exchange for the coin or token you are targeting. It is important that all value entering cryptocurrency is attributed to your Checkbook IRA Or Solo 401(k) Trust. If you purchase a cryptocurrency with IRA funds, and those leave a centralized exchange, it is your responsibility to prove ownership from your retirement account, and that your IRA Trust, IRA LLC, or Solo 401(k) owns that asset. Blockchain records will show the movement of Bitcoin, Ethereum, USDC, or other crypto assets leaving the exchange registered in the name of your retirement account, and almost all decentralized exchanges would continue to show the flow of cryptocurrency transactions as Bitcoin, ETH, or USDC are exchanged for another asset. Be aware that the further you stray from a centralized exchange, or use transactions that make it hard to track or obscure blockchain records, you might struggle to prove an asset is owned by your IRA. This could lead to a high prohibited transaction or audit risk, and for those who are not experienced in decentralized cryptocurrency, a higher risk of hacks, scams, or loss of assets. Only advanced crypto users should attempt such transactions, and only those aware that regulations with IRAs and cryptocurrency are constantly evolving. Newer users should not use their IRAs as experimentation, due to the complexity and high-risk nature of decentralized crypto. New decentralized cryptocurrency users often fall into scams, hacks, and loss of secure crypto keys due to social engineering.

• Review our article here.

  Other Webinars:

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

  Crypto for Self-Directed IRAs with ErisX exchange

• 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 can back them up during an audit.

• Extensions of credit are not allowed to IRAs. All loans to the IRA or Solo 401(k) investor (you) must be non-recourse and cannot use calculations of the client's personal credit history, as this is a self-dealing violation, as your IRA would be receiving a loan benefit using your personal credit history, taxable financial assets, car, and personal residence. You are always a prohibited person when investing with your IRA. Rocket Dollar has instructed exchange partners NOT to allow margin trading to IRA or Solo 401(k) clients to help clients avoid certain prohibited transactions. Non-recourse loans are still available and allowed in the defi space, such as an investor placing $10,000 of USD Coin in an AAVE contract as collateral and receiving a loan and interest payment as part of the defi contract. However, IRA investors should know that this can significantly complicate their taxes and require a 990-T tax form. Solo 401(k) investors can benefit from UBIT tax protections for non-recourse loans. As non-recourse loans in an IRA and more rarely, a Solo 401(k), can complicate tax return and tax questions, you should either avoid these loans entirely or review questions you have with a tax advisor that is qualified in filing a 990-T Form.

• Staking is where a crypto investor commits their crypto coins to a staking protocol, and may directly or indirectly pay for processing power to support the blockchain network. Rewards are then given to support this activity when a “block” is successfully processed. All staking rewards/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, 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) and many other platforms that handle staking rewards for you. The investor must handle all tax implications for this asset class as Rocket Dollar cannot provide tax advice.

  Most blockchain native 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, meaning that you must have adequate records to prove that the staking service and rewards are attributed to your IRA.

  Lending is fundamentally different than staking, as the reward comes from the investor providing liquidity. 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 is 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 have fully studied and understand the impact of UBIT taxes.

• If the IRS feels an IRA holder has committed a prohibited transaction, they can order a distribution of your IRA, which means all dollars will lose their tax-advantaged status and possible early distribution penalties. There are some basic rules called 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. Solo 401(k)s can receive a 15% penalty on their account from a prohibited transaction, plus any early withdrawal penalties

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

• Mining is popular in the Bitcoin cryptocurrency community. The increased difficulty in mining over time has resulted in the rise of professional services that specialize in assisting investors with the management of mining machines and power requirements.

  Because IRA investors must keep their investments “at arm's length,” it is preferable to have a professional service manage a mining rig rather than any infrastructure you set up yourself.

  When a mining rig is running at your home or on your power bill, it becomes almost impossible to keep your investment at "arms-length" and puts you 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.

  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. 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 specialized CPA. As this is a new area of tax law and compliance, do not expect Rocket Dollar to assist, and do not expect all CPAs to have expertise in both cryptocurrency and UBIT. Rocket Dollar can recommend a CPA if you inquire at info@rocketdollar.com.

• Rocket Dollar clients opening new checkbook IRAs will have an IRA Trust, which does not have any taxes in California. For older clients with an IRA LLC, 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. You can also inquire about converting your account to an IRA Trust by reaching out to us.

• 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. If Airdrops or other assets are sent to your retirement wallet, they all must be compliant with your retirement account

• Many popular NFTs are digital collectibles (Bored Apes, Cool Cats, Azuki, Pudgy Penguins, 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) are 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, 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.