Digital Currency is an alternative investment that many consider as a hedge against inflation, much like precious metals, and for its diversification from the conventional market. Self-Directed IRA (SDIRA) custodians, like Preferred Trust Company, are licensed to custody the digital asset. For more information, review IRS Notice 2014-21 which describes how existing general tax principles apply to transactions using digital currency. The notice provides guidance in the form of answers to frequently asked questions.
BEFORE YOU INVEST IN DIGITAL CURRENCY
These are important factors to consider when investing in digital currency with an IRA.
- You cannot use the cryptocurrency to purchase goods or services.
- You need to be willing to look at the investment in digital currency as a long-term hold strategy.
- The pros and cons of investing through a broker dealer or an IRA LLC with checkbook control.
- Performing research and due diligence on the broker dealer.
- The security of your digital currency assets in cold storage vs hot storage.
- Your tolerance for risk.
DIGITAL ASSET SAFETY STARTS WITH SECURE STORAGE
Although the digital currency exchange platforms have implemented a high degree of security, malicious attacks still occur. You cannot ignore the headlines as digital currency continues to be a popular target for organized cyber criminals, whether they are stealing it outright or demanding it as an extortion payment in ransomware attacks.
Ninety percent of custodians are holding custody of digital currency on an exchange platform, typically in non-segregated hot storage wallets. Not Preferred Trust Company. We stand by our policy for a more secure environment with segregated cold storage. Call us crazy, but our clients believe that the safety of their digital currency is more important than the fancy apps and unsegregated custody approach to their hard earned money.
Hover over the images below to learn more:
Segregated Cold Storage
Non-Segregated Hot Storage
HOW TO INVEST WITH AN IRA
When it comes to investing in digital currency in an IRA, clients have two options to choose from. The investor that wants to be more hands-off with the investment process and “set it and forget it” will typically go the route of working with the IRA custodian to facilitate the investment. The investor that wants to be more hands-on and buy and sell like a day-trader will take the more sophisticated route with an IRA LLC with checkbook control.
Select the tabs below to learn more about your investment options:
Step 1: If you are not currently a Preferred Trust Company client, you need to open a Self-Directed IRA account.
Step 2: Once the application is completed, you are either making a contribution to your IRA or rolling over or transferring funds from another retirement account to fund your Self-Directed IRA. And yes, we can help walk you through this process. It is not painful at all.
Step 3: If you are working with a digital currency dealer, we will work in cohesion with them to purchase the digital currency on a trading platform and store your digital currency investments in a cold storage environment.
Step 4: Sit back and let your retirement account grow. Or be proactive, buy and sell at the opportune time.
Step 1: If you are not currently a Preferred Trust Company client, you need to open a Self-Directed IRA account.
Step 2: Once the application is completed, you are either making a contribution to your SD-IRA or rolling over or transferring funds from another retirement account to fund your Self-Directed IRA. And yes, we can help walk you through this process. It is not painful at all.
Step 3: You will also need to set-up the LLC that will be owned by your SD-IRA with an associated bank account to give you checkbook control. You can figure this part out on your own with a legal professional, or Preferred Trust Company provides the service to assist with filing the LLC with the state of Nevada (learn more).
Step 4: Once your SD-IRA and LLC set-up, you will direct Preferred Trust Company to transfer the qualified funds in your SD-IRA to the checking account of the LLC, establishing the ownership of the LLC by the SD-IRA.
Step 5: You can now engage in a cryptocurrency exchange to buy, sell and store digital currency on your own terms.
When you hold digital currency in a Self-Directed IRA, there are 3 components to maintaining a compliant account with Preferred Trust Company.
It is the policy of Preferred Trust Company that all accounts maintain a minimum cash balance of $500.00. The minimum cash balance cannot be used to pay fees. The minimum account balance can only be obtained by transferring funds from another Qualified Retirement Account, making a contribution to the account, or selling precious metals to ensure your account complies with the policy.
Your digital currency is stored on a ledger device in a secure, undisclosed location. The Annual Depository Fee associated with the storage of your digital currency is considered an expense related to the investment and must be paid directly from your IRA. The Annual Depository Fee can only be obtained by transferring funds from another Qualified Retirement Account, making a contribution to the account, or selling digital currency to ensure your account complies with the policy.
If your self-directed IRA exclusively holds precious metals as the only asset the Annual IRA Account Administration Fee is $100.00 a year. This fee is due in the month prior to the anniversary date you established your IRA account with Preferred Trust Company. The Annual IRA Account Administration Fee can be paid by credit card, check or wire. If you elect to send a wire, you must also include an additional $30.00 Wire Fee to the amount you are wiring.
The list below are the digital currencies that Preferred Trust Company will custody on behalf of your Self Directed-IRA.
- Bitcoin Cash
- Ethereum Classic
The trading platform’s reliability and regulation is of the utmost importance as the IRA client’s funds will be sent to and from the trading platform to purchase and sell the digital currency. That is why Preferred Trust Company works with the Genesis exchange platform. Genesis is one of the few exchange platforms that is licensed and regulated by the U.S. federal government.
Investment process with Genesis:
- The digital currency dealer accesses the trading platform approved by Preferred Trust Company online when consummating the purchase of digital currency with the client.
- The digital currency dealer sends the client a Preferred Trust Company Investment Authorization and Direction Form to be executed as required by the custodian, and then sends the executed form to the custodian.
- The custodian verifies the purchase and wallet address of digital currency on the trading platform.
- Preferred Trust sends the funds from the IRA to the Trading platform. Once the funds are received by the trading platform, the trading platform transfers the digital currency to the specified wallet address provided by the custodian.
- Preferred Trust verifies the digital currency was received by the specified wallet, and then informs the client that the digital currency transaction has been completed.
Now let’s say you want to see what the value of the digital currency is. This is where Preferred Trust Company does not see the value of the fancy app just for your digital currency. In this day and age, most websites are mobile friendly.
- Go to the Preferred Trust Company client portal, which is mobile friendly and login to your account to see the daily value of your digital currency along with all other relevant information pertaining to your IRA.
- Should you want to view your digital currency on the blockchain, Preferred Trust Company provides you with your unique wallet address upon the completion of your purchase. Put the wallet address into the blockchain for further verification of the amount held and the value.
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 advantages and pitfalls to this level of responsibility that individuals should seriously consider before moving forward.
- 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.
- 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 72.
So what happens if you’ve invested 100% of your retirement dollars in digital currency? You have two options:
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 72 then you could contribute to the IRA to proceed with an in-kind distribution. If you are over the age of 72, the second option is your only option.
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.
As a self-directed custodian, Preferred Trust Company does not endorse, offer, or sell any investments. Preferred Trust Company does not provide any tax or legal advice. Resources are provided for general information. We strongly recommend that the investor seek professional advice from the appropriate legal, accounting, and/or tax professionals prior to making any investment decisions. Selection of the investments and the performance of those investments are the sole responsibility of the investor and not Preferred Trust Company.