Cryptocurrency IRA for Beginners

cryptocurrency ira

As cryptocurrency grows in popularity, we are seeing that trend grow in self-directed IRAs as well. Investors look at crypto as a way to diversify their retirement accounts. This article discusses what a cryptocurrency IRA is, self-directed investing options, and concerns that investors have with cryptocurrency.

What is Cryptocurrency?

Cryptocurrency (or “crypto”) is a digital currency. It’s a form of payment that can be exchanged for goods and services online. Cryptocurrency is decentralized, not generally issued by any central authority. This makes crypto immune to government manipulation or interference.

Key Terms to Know

Blockchain

A system in which a record of transactions made in a cryptocurrency is maintained. This system includes several computers linked in a peer-to-peer network.

Cryptocurrency Key

When you first buy cryptocurrency, you receive two keys. The first is a public key that identifies your crypto (like your bank account number). The second is a private key that unlocks the use of your crypto (like your online banking password).

Cryptocurrency Wallet

Storage for your private keys that keep your cryptocurrency safe and accessible. Wallets also allow you to send, receive, and spend cryptocurrencies. There are three main types of wallets for crypto.

  1. Paper wallets in which your keys are written on paper and stored safely.
  2. Hardware wallets in which your keys are safely stored on a thumb drive.
  3. Online wallets in which your keys are stored in an app or other software.

Online wallets are the best way to store your cryptocurrency as it makes sending, receiving, and using crypto easy. For cryptocurrency held in an IRA, you must have an online wallet.

Cryptocurrency Broker

A firm or individual that acts as an intermediary between the cryptocurrency markets. They facilitate the buying and selling of cryptocurrencies.

Cryptocurrency Exchange

An online platform for buyers and sellers who trade crypto.

Benefits of Investing With a Cryptocurrency IRA

Diversification

Cryptocurrency is an investment that allows investors to diversify their retirement portfolios. A truly diversified portfolio includes traditional assets (stocks and bonds, for example) and alternative assets (precious metals, private placements, real estate, etc.). We are seeing IRA investors use crypto as an extra way to diversify their portfolios.

Tax-Advantaged Growth

Investments held within a retirement plan’s gains grow tax-advantaged. If you have a Traditional IRA, SEP IRA, or SIMPLE IRA, your gains grow tax-deferred. With a Roth IRA, your gains grow tax-free.

Tax-Free Trades

Investments made within an IRA are sheltered from taxable events.

Easier Tax Reporting

Once you reach the age of 59 ½, you only pay income taxes when you withdraw from a Traditional, SEP, or SIMPLE IRA. With a Roth IRA held for five years or more, you never pay capital gains taxes or income tax.

By investing in cryptocurrency with an IRA, you are not required to report crypto transactions on your annual taxes. You simply provide contributions made to the account to the IRS. Your IRA custodian helps with other tax reporting.

Disadvantages of Investing With a Cryptocurrency IRA

Volatility

Cryptocurrency is highly volatile. Their values can vary wildly, and the market is still not fully regulated. Most investors take a long-term investment approach to this investment type.

Long Haul

You cannot withdraw gains before you turn 59 ½ without paying a tax penalty.

You Can’t Consolidate

Moving existing non-IRA cryptocurrency investments into an IRA is not permitted.

Cryptocurrency IRA Investing Options

There are a couple of ways in which you can invest in cryptocurrency with an IRA.

Option 1.1: Invest Directly With Your IRA

The first investment option you have is to directly invest in cryptocurrency by setting up a trading profile in the name of your IRA account. You can do this with any crypto broker that accepts deposits from an IRA. You will use the IRA account number to establish the broker account.

With this investment option, only the IRA custodian has access to the crypto keys. As the IRA owner, you need to instruct the custodian on which crypto investments you would like to buy, sell, and trade.

The steps for this investment option are illustrated below.

Steps to Invest in Cryptocurrency Directly in an IRA

Option 1.2: Invest in a Bitcoin ETF Directly With Your IRA

Another investment option you have is to invest in a Bitcoin ETF. This provides the opportunity to follow the Bitcoin futures market without directly holding Bitcoin. There are no keys or storage to worry about with this option. You would invest in a Bitcoin ETF by opening a trading account with a cryptocurrency broker.

As of now, Bitcoin is the only cryptocurrency with an ETF. Learn more about Bitcoin ETF here.

Option 2: Set Up an LLC (Checkbook IRA)

The second investment option you have is to open an LLC owned by your IRA. The LLC must be a newly formed entity owned solely by your IRA. The LLC will need a business checking account funded by your IRA.

With the LLC’s checking account, you will then establish a wallet with which to buy, sell, and store crypto. With this structure, you as the LLC manager are responsible for storing your crypto securely through cold storage or a third party. You may not personally store the cryptocurrency.

You are also responsible for the funds in the LLC’s checking account. The LLC’s checking account is for investing in crypto and other investments held within the LLC. Income and expenses related to the cryptocurrency investments flow through the LLC.

Because the IRA owns 100% of the LLC, the LLC receives the same tax-advantaged status as the IRA.

The steps for this investment option are illustrated below.

Steps to Invest in Cryptocurrency With an IRA LLC

Benefits of Investing With an LLC

As the LLC manager, you have access to your cryptocurrency’s private keys. With access to your private keys, you may buy, sell, and trade crypto at your convenience.

Concerns and Roadblocks With Cryptocurrency IRAs

Due Diligence

While cryptocurrency can be a lucrative investment, it is also volatile. Just like all self-directed investments within an IRA, it is up to the account owner to perform due diligence on crypto assets they want to add to their portfolio. It is also the responsibility of the account owner to conduct due diligence on the crypto broker, exchange, or private placement they invest with.

Rules to Consider

  • You cannot buy cryptocurrency personally and sell it to your IRA.
  • The trading platform’s procedures must meet IRS rules and regulations.
  • You cannot use cryptocurrency held by your IRA or IRA LLC to buy goods or services.
  • The IRS considers cryptocurrency personal property for tax purposes.
  • Storing a hard drive at your home may be a prohibited transaction. This could risk penalties or fines, causing your IRA to lose its tax-advantaged status.

Cryptocurrency IRA FAQs

Can I use my existing Midland account to trade cryptocurrency?

Yes. You can add cryptocurrency to an existing self-directed Midland IRA account.

Can I hold other self-directed investments in my IRA along with cryptocurrency?

Yes. You can use the same IRA account to invest in crypto and any permissible alternative asset.

Do I have access to my private keys?

If you invest directly with your IRA, no. But, if you use the IRA LLC structure to invest in cryptocurrency, then yes you do.

How long does it take to start investing in crypto after funds reach my account?

Once Midland receives funds in your IRA account, you can direct those funds immediately. Midland will wire those funds the next business day.

If I open an LLC in my IRA to invest in cryptocurrency, can I use the same LLC to invest in other assets?

Yes, you can use the IRA LLC to invest in any asset that is allowable in an IRA.

What are Midland’s fees?

If you choose to invest directly through your Midland IRA account, your annual asset fee will be $325 per year. There is also a one-time account setup fee of $50. Transaction fees to withdraw or add funds to the account are $25 each.

If you choose to invest with an IRA LLC at Midland, your annual asset fee is $325 per year. There is a one-time account setup fee of $50 and a $100 initial transaction fee. Check fees are $5 and wire fees are $30 for additional funds sent to the LLC. Midland Forms can establish your LLC for $695 + state filing fee.

You can open a crypto IRA account at Midland Trust today. Invest in Bitcoin and other cryptocurrencies to diversify your portfolio and maximize your retirement savings. For questions about opening an IRA, please don’t hesitate to contact us at (239) 333-1032.

New Article Featured on Forbes

featured on Forbes

Did you see our latest article on Forbes? Brandon Hall, Chief Operating Officer of Midland Trust, wrote an article discussing proposed bill Section 138312. The proposed legislation would not only limit your IRA from investing in private placements, but it would also force any IRA holder that is already invested in private placements to liquidate their investment, therefore causing a taxable event. This bill would affect high net worth investors and all investors regardless of their tax bracket if passed. There are still ways to stop this bill from being passed, such as writing to your local congressman telling them you oppose Section 138312 and signing a petition.

The article, “New Bill Could Throw A Monkey Wrench Into Retirement Planning,” was posted on Forbes.com on October 21, 2021.

Bitcoin ETF in a Self-Directed IRA

bitcoin etf

Changes are coming fast in the cryptocurrency world. Starting this week, clients will be able to hold a new Bitcoin ETF in their Midland self-directed IRA. The best part is that it is easy to set up.

Bitcoin ETF Launch

Bitcoin is making headways once again as it crosses $60,000 and passes its all-time highs. The recently strong, steady moves in the Bitcoin market are possibly due to the SEC approving the first Bitcoin futures ETF on October 15, 2021. Bitcoin exchange-traded funds (ETF) will make its debut on Tuesday, October 19, 2021, on the NYSE.

As Neil Armstrong stated during the moon landing, “That’s one small step for man, one giant leap for mankind.” This is one small step for Bitcoin, one giant leap for Bitcoin regulations (but in a good way for Bitcoin investors).

The much-anticipated ETF from ProShares will track the Bitcoin futures market and officially debut on Tuesday. It will begin trading on October 19, 2021, on the NYSE under the ticker “BITO.” Three other Bitcoin futures ETFs are expecting to move forward with their launches this month, with talk of Invesco’s coming as soon as this week.

[For a Midland client to hold an ETF in Bitcoin, Midland will set the client up with a brokerage account at TD Ameritrade or TradeStation. This account allows the client to buy and sell this new ETF as they wish. The accounts are easy to set up. Please get in touch with the trading department to get started ASAP.]

What Are Bitcoin ETFs?

An ETF is an exchange-traded fund that tracks the price of a basket of underlying assets and is tradeable on the US Stock exchanges. In this case, the ETF will track the price of Bitcoin futures trading on the Chicago Mercantile Exchange (CME) rather than Bitcoin itself.

Why Are The Bitcoin ETFs “Futures” Based?

The Bitcoin ETF will not actually hold Bitcoin. Instead, they will deal with Bitcoin futures, which trade separately on regulated US exchanges such as the CME.

Allowing ETFs for Bitcoin may be one of the biggest endorsements from the SEC for crypto to date. The crypto industry has been at odds with regulators for years. Since 2017 several asset managers have sought to launch a Bitcoin ETF. All were rejected by the SEC (Securities and Exchange Commission). But things changed in an August speech as Gary Gensler of SEC said he would favor investment vehicles, including futures.

Regulators prefer future-based ETFs for Bitcoin because the SEC lacks jurisdiction over crypto trading venues that aren’t registered as exchanges in the US. The SEC feels this leaves investors vulnerable to fraud and manipulation because regulations have no insight into where Bitcoin is coming from or how the prices are being determined.

Pros of Bitcoin ETF

  • Easy way to gain exposure to Bitcoin without having to have money leave your brokerage account
  • Small step to making Bitcoin more widely accepted
  • Makes it easier for institutional investors to get exposure

Cons of Bitcoin ETF

  • ETF have fees of approximately .5%
  • You don’t own or hold the actual Bitcoin

What Does This Mean for Midland IRA Clients?

Getting exposure to Bitcoin is easier than ever. You no longer need to set up a futures account or cryptocurrency account if you want exposure to Bitcoin. All you need is a brokerage account you can buy stocks with! The new Bitcoin ETF can be bought and sold in the same manner you do stocks.

Although Midland is not a brokerage, clients can open a brokerage account with Midland through either TD Ameritrade or TradeStation. Please get in touch with us at (239) 333-4464 or [email protected].

Andy Anger, Team Lead in Client Services

Written by Andy Anger

Team Lead in Client Services

Who will be affected by the proposed change in IRA laws

Midland Trust Team

Meet Midland Trust, an employee-owned company…We are a self-directed retirement company. We help our 20,000 clients invest their retirement savings in alternative investments. This legislation targets people like our grandparents, pretty regular people, and changes the rules on them when it’s too late for them to start over in saving for retirement.

Our clients drive new business by investing in local, women, and minority-owned businesses. They save for their retirement using investments they know and understand including real estate lending and private equity. We grew from 3 employees to over 60 in 3 states and we are employee-owned, so everyone who works here has a real stake in what happens. We also really care about our clients and believe their investment choices should not be limited.

So that’s Midland’s story. What’s yours?

Did you invest in alternative investments using retirement funds and are you worried about losing the ability to choose what to invest in?

Did you start a business or launch something new through retirement funds?

Tell us your story so we can publish it here.

Dear President Biden and Senator Wyden – I AM NOT PETER THIEL!

i am not peter thiel

Everyone is mad at Peter Thiel. I am angry at him; he understood and used the system that now seems to be forcing an enormous overreaction. Congress is proposing dramatically restricting IRA investing because of what he did. Using the current tax code, Peter Thiel has accumulated over 5 Billion dollars in his Roth IRA. That is right, 5 Billion dollars. And the politicians are mad, acting like an angry child who says he will run away from home because he is mad at his parents. It’s a huge overreaction and reveals a lack of understanding on the part of the politicians who, like that angry child, are upset over this one situation.

Congress should not bury this wide-ranging provision in a 645-page document. It needs to be vetted, carefully considered, and crafted so that whatever its intent, it does not throw the baby out with the bathwater. Retirement accounts are by definition supposed to allow Americans some control over their financial future by encouraging saving and growing these savings in a balanced, diverse manner to be used once they retire. This legislation eliminates those principles without giving proper thought to the implications to every American who now holds or intends to hold a retirement account.

However, the truth is Peter Thiel did it legally. The politicians wrote the rules that he followed and accumulated an enormous amount of wealth. From what I have read, Mr. Thiel appears to be an eccentric and highly egotistical person. But he also took on some risk when he grew his account, which he was willing to absorb should things have gone a different way. I think where he made a mistake was not just accumulating the wealth, but flaunting what he did. This has made the politicians even madder.

The Average Roth IRA Is Only $39,000

Did you know the average Roth IRA owner has $39,000 in their account? I just read there are only 23,000 IRA accounts in the United States that are over 10 Million dollars. Ninety percent of these accounts are under 15 Million dollars. Over 50% of the value in that 90% was a rollover from a 401k. So we are now talking about 10,350 IRA accounts in the entire country that actually grew their IRA from annual contributions only (currently at $6,000 per year).

My point is that Congress, in its infinite wisdom, has decided to penalize 99.9% of the country because approximately 10,000 taxpayers worked incredibly hard to build their IRAs over 10 Million dollars. Sorry, I am an accountant, I like sharing numbers, and those numbers speak volumes about whom politicians are striking out against and whom they are hitting. Also, this does not speak to IRA Owners’ current year income; you cannot compare income to the value of an IRA.

Forced Distribution for IRAs Valued Over $10 Million

Part 3 of the House Ways and Means Committee takes a direct shot at IRAs; if you have an account over 10 Million dollars, it is proposed that you will be forced to take a distribution on 50% of the value over 10 Million dollars. Wow, that is a whopper of a required minimum distribution (RMD). Just so you know, the “value of over 10 Million dollars” is the accumulation of Traditional IRAs, Roth IRAs, and your 401k account. They are looking at all your retirement accounts, not just IRAs. So if you took your company pension, invested it wisely, let compounding do its magic, you will be made to pay the price. While I understand not many people you and I know fall in this category, but if they did, I sort of feel like they have every right to both benefit and suffer from investment decisions.

Elimination of Private Investments in IRAs

To add a little whipped cream to the bill, Section 138312 eliminates certain private investments in IRA accounts. If the asset is for accredited investors, it will not be allowed in an IRA. This is not for just Roth IRAs but all IRAs. For example, above, I noted approximately 10,350 investors that have an IRA above $10 Million. I would venture a guess that most of those IRA holders accumulated their wealth through solid investing using a mix of the stock market and private investments. These investors are not Peter Thiel, but Congress has decided to throw them in the same pot and limit their investing. There is a big difference between a $5 Billion IRA and $10,000,001. I am not underplaying $10,000,001, but we are comparing apples and oranges. There needs to be some sanity in our tax laws and whom we choose to tax.

Dave Owens, President of Midland Trust Company

Written by Dave Owens

President of Midland Trust Company