Cryptocurrency in an IRA
Cryptocurrency is a digital form of tokens or “coins” that can be exchanged for goods and services. Many companies issue their own digital currency that can be traded specifically for their goods or services. Cryptocurrency works using blockchain technology. Blockchain is a highly secure technology that manages and records crypto transactions. There are many kinds of cryptocurrency available, more than 6,700 in fact. You can invest in cryptocurrency in a self-directed IRA. When you do so, your profits go directly to the IRA tax-free.
The IRS considers cryptocurrency property. They tax cryptocurrency like stocks and bonds. That’s why IRA holders need a custodian to manage their IRA.
Why Invest in Cryptocurrency?
Many see crypto as the currency of the future. Some expect the value of digital currencies to become highly valuable. And the blockchain technology behind crypto has transformed digital security. Cryptocurrency is self-regulated, ensuring stability, preventing double-spending, and creating a long life span. Crypto trades 24/7.
When you invest in digital currency with an IRA, the gains grow with tax advantages. If you invest with a Traditional IRA, your gains are tax-deferred until you take a distribution. In a Roth IRA, gains grow tax-free.
How to Invest In Cryptocurrency in a Self Directed IRA
Option 1: Invest Directly With Your IRA
You can set up a trading profile in your IRA’s name. As long as the trading platform accepts account deposits from Midland, you can use your IRA to invest in crypto.
Option 2: Set Up a Checkbook IRA
You can set up a single-member LLC in the name of your IRA. This structure is often known as a Checkbook IRA. With an LLC, you can direct investments in any crypto platform you choose. LLCs are an easy way to invest in crypto. They allow you to transfer money to and from the trading account. Trade crypto 24/7 with this investment structure. Please note that it has to be a newly formed entity owned solely by your IRA.
Process for Investing in Digital Currency in an IRA
Open an Account
Open a Midland account.
Fund the Account
Fund the account via transfer, rollover, or contribution.
Set Up an LLC (Optional)
If you choose to open a Single-Member LLC, you will need to take this step.
Choose a Trading Platform
Ensure the platform you choose can title the trading account in your IRA’s or LLC’s name.
Make the Investment
Lastly, invest in your desired cryptocurrency through your trading platform.
IRA Investment Strategies
Option 1: Trade Crypto Directly
Cryptocurrency is classified as property for tax purposes, so you have tax-advantaged benefits for short and long-term capital gains.
Midland currently works with two trading platforms: ErisX and Tradestation.
Option 2: Hedge Funds
Hedge funds that invest in cryptocurrency or equity distribute K-1s to investors that mostly include all capital gains.
The two exchanges we work with are ErisX and TradeStation. At this time both companies offer the same coins: Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
While TradeStation and ErisX are much smaller cryptocurrency companies than more well known names such as Coinbase, Kraken or Gemini, both TradeStation and ErisX have fully accomodated IRAs. In order for Midland to allow clients to trade on a cryptocurrency platform we require the following:
- The account is titled in the name of the IRA “Midland Trust Company FBO Client Name, Client Acct #” instead of your name personally.
- The tax ID on the crypto account is Midland’sand not the SSN number of the IRA holder. The SSN of the IRA holder would indicate the account being personal/taxable.
- TradeStation and ErisX only accept funds from Midland and likewise only release funds back to Midland. This is to prevent clients from commingling personal funds with IRA funds OR not reporting to the IRS contributions/distributions.
- TradeStation and ErisX provide us with year-end valuations. The IRS requires that we report to them the year-end value of everything that is within an IRA.
- TradeStation and ErisX provide us copies of the account numbers once the accounts are reviewed/approved. We cannot take account numbers from clients as clients have in the past given us personal account numbers.
New: Bitcoin ETF
A new Bitcoin ETF by ProShares tracks the futures price of bitcoin under the ticker symbol “BITO” on the NYSE. This means you can now gain exposure to bitcoin through a brokerage account. BITO can be bought and sold like a stock and eliminates the need for a crypto wallet and an account at a cryptocurrency exchange if you want exposure to Bitcoin only. Currently, Midland clients can set up a Midland TD Ameritrade or Midland TradeStation brokerage account.
Rules & Things to Note With Crypto Investments in an IRA
- You cannot buy cryptocurrency personally and sell it to your IRA.
- The trading platform’s procedures must meet IRS rules and regulations.
- The IRS considers cryptocurrency personal property for tax purposes.
- When you hold digital currencies in an IRA, they receive the same tax-sheltered advantages as any other IRA investment.
Be sure to consult with your financial advisor to decide if cryptocurrency in an IRA is the right strategy for your investment portfolio.