Cryptocurrency is a newer asset class and thus creates a few common questions.
We have instructions for 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 Gemini and Coinbase may need at least 1-2 weeks to open an account and will need significantly longer timelines to open an account during crypto all-time highs. ErisX and River Financial can open an account in a week.
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.
If the exchange does not accept a W-9, there could be some initial confusion under tax review that the LLC is seen properly as a disregarded entity inside of a retirement account.
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.
All activity must be credited to the IRA LLC or one wallet 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. There is currently no IRA guidance to taking crypto into a hardware device, and mistakes could lead to penalties and fines according to the prohibited transaction rules. It is best to leave the cryptocurrency on exchange hot or cold wallets when considering possible future tax rulings and tax enforcement.
We would suggest reviewing the second half of these two webinars for general information and their section on cold/hardware wallets. Rocket Dollar cannot give tax advice.
Webinar with exchange ErisX - Crypto for Self Directed IRAs
You can register for a service like Gemini Earn, Celius Network, or Blockfi as they can all take an IRA LLC or Solo 401(k) trust in their entity signup. All staking interest must be credited to the IRA. Personally pocketing rewards or interest instead of returning gains to your retirement account would be a prohibited transaction.
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.
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 cryptohere.
Yes, but you will almost certainly be subject to UBIT, or unrealized business income tax. The IRS sees most mining activity as active trade or 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.
When a mining rig is running at your home or on your own power bill, it becomes incredibly difficult to keep your investment at "arms-length" and at high risk of a prohibited transaction like self-dealing
Solo 401(k)s are not exempt from all types of UBIT. Solo 401(k)s are exempt from Unrealized Debt-financed Income (UDFI), but mining will trigger UBIT, not debt-related UDFI.
Passive investments are less likely to be subject to UBIT.
You will need to review and 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.
NFTs are digital collectibles. 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. Some common examples of collectibles the IRS enforces are fine rugs, diamonds, gems, artwork, classic cars, and baseball cards.
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.