Digital Currency Investing

Preferred Trust works with Coinbase as an exchange platform. Coinbase is one of the few exchange platforms that is licensed and regulated by the U.S. federal government.

Investment process with Coinbase:

1. Client completes the Digital Currency Investment Purchase Authorization and Direction form.
2. The purchase will be completed within one (1) business day from receipt of the executed form.
3. Preferred Trust assigns a unique wallet address to the IRA for the purchase of the specific type of digital currency, i.e., Bitcoin. The wallet address is provided to the trading platform.
4. Preferred Trust sends funds from the IRA to the trading platform and the trading platform sends the digital currency to the specified wallet.
5. Preferred Trust verifies the wallet address received the digital currency and a confirmation email is sent to the client.

Now let’s say you want to see what the value of the digital currency is.

• You can view your digital currency assets with pricing through the Preferred Trust online account portal. The value of the digital assets are updated each evening, excluding weekends.
• Should you want to view your digital currency on the blockchain, Preferred Trust provides you with your unique wallet address upon the completion of your purchase. Your wallet is viewable through any blockchain explorer.

Below is an example of the information you will see through the online account portal.

IRA LLC’s are a great option for investors that are confident in their ability to manage their retirement account with a thorough knowledge of SD IRA prohibited transactions and, in general, IRS regulations regarding IRA accounts. There are advantages and pitfalls to this level of responsibility that individuals should seriously consider before moving forward.

Pros

• Increased speed of investment: Complete signing authority and direct access to qualified funds means that the IRA owner can move in-and-out of investments more quickly. For example, this can be pivotal for investments in digital currency, where the price of the asset is dependent on the ability to purchase and sell at a certain time.
• Personal asset protection: LLCs in general provide personal asset protection by keeping your retirement assets and your personal finances separate.
• Fewer fees: Since the IRA LLC investment activities are independent of the custodian, investment transaction fees do not apply. However, the custodian is still responsible for administrative activities, such as reporting to the IRS, processing contributions and distributions, etc., which means that administrative fees will still apply.
• Invest in both alternative and publicly traded assets: An IRA LLC gives you the flexibility to invest in alternative assets and publicly traded assets without having to rollover or transfer qualified funds between two different accounts.

Cons

• Formation and ongoing expenses of having an LLC.
• Increased responsibility: This autonomy places greater responsibility on the IRA owner to ensure that the IRA LLC’s activities remain compliant with IRS rules and regulations. Familiarizing yourself with the IRS prohibited investments and transactions will be pivotal to ensuring that your account does not lose its qualified tax protected IRA status.
• Sole protector: You are your own last line of defense, which means that proper research and due diligence will be essential for protecting your retirement account from fraud. This includes protecting yourself from fraudulent digital currency exchange platforms and storage options.

In 2019, the IRS issued IRS Rev. Rule 2019-24 to establish tax implications for when digital currency investors participate in an “airdrop” of new digital currency derived from a “hard fork.” Below is a direct excerpt from the ruling:

(1) A taxpayer does not have gross income under § 61 as a result of a hard fork of cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.

(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new digital currency following a hard fork if the taxpayer receives units of new digital currency.

If you participate in digital currency investments with a Self-Directed IRA, you may be thinking that your tax advantaged account will shelter your investment returns from any tax consequences. Unfortunately, this is not an insulated event for an IRA account.

To learn more about this type of transaction and your options, read our blog.

At some point in your lifetime, you will be required to distribute the assets in your retirement account if you have a Traditional IRA. Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that they reach age 73.

So what happens if you’ve invested 100% of your retirement dollars in digital currency? You have two options:

Option 1:

You can take an in-kind distribution of the digital currency, but this will cost you. You will incur processing fees assessed by the IRA custodian. If you’ve drained the cash in your IRA account you will not have the funds necessary to pay the costs associated with selling the investment, which costs are required by the IRS to come from the IRA. If you are under the age of 73 then you could contribute to the IRA to proceed with an in-kind distribution. If you are over the age of 73, the second option is your only option.

Option 2:

Option two involves selling a portion of your digital currency. This is probably the worst-case scenario since you may not be able to recoup the amount you paid for the digital currency – especially if you purchased them within a few years of needing to process an RMD. The saying continues to ring true today, do not put all your eggs in one basket. Having some liquidity in your IRA account when you have non-income generating investments can make a significant difference between your ability to build your retirement, taking a loss, or potentially disqualifying your IRA account.