Invest your IRA in Bitcoin and Other Cryptocurrencies
2017 is likely to be considered the watershed year for cryptocurrencies, which have become an exceedingly hot investment asset class. Since the creation of Bitcoin in 2009 it has largely been an obscure interest of an exclusively tech-savvy audience. This year has changed the game, with a series of regulatory acknowledgements and broader implementations of the underlying blockchain technology.
Prices of Bitcoin, Etherium, Litecoin and a host of other virtual currencies have soared as a result. Bitcoin has exhibited a 396% gain in value from a January 1, 2017 price of $997 to a peak of $4950 on September 1st. Etherium, which is both a virtual coin and a systems platform designed to operate on “smart contracts” has gone from $8.18 to $379.50 in the same time period. That is an amazing 4539% gain in value in just 9 months.
As more governments, central banks, financial institutions and business look at ways to work with virtual currencies and the potential of blockchain technology, the question is not if, but rather when cryptocurrencies will become mainstream.
Many futurists are predicting that the blockchain technology upon which cryptocurrencies are based will bring about economic changes on the same level of magnitude as the internet and world wide web did 20 years ago. So, if we are in the cryptocurrency equivalent of AOL and dial-up connections today, what does “broadband” blockchain look like in 5, 10, or 20 years? Projects are under way around the globe to move all kinds of paperwork-intensive transaction-based businesses such as container shipping and property title recording onto distributed and secure blockchain networks.
Your IRA or Solo 401(k) Can Invest in Bitcoin
In 2014, the IRS issued Virtual Currency Guidance in notice 2014-21. Bitcoin is specifically named as part of a class of virtual currencies deemed to have an equivalent value in real currency. As such, and because these virtual currencies can be purchased for or exchanged with US Dollars, they are an acceptable asset class for IRA and 401(k) plans to invest in.
Ways to Invest
As of this writing, there are effectively 4 ways to invest in virtual currencies:
- Direct ownership of virtual currency “Coins”
- Privately held virtual currency “Funds”
- Coin Mining operations / contracts
- Initial Coin Offerings (ICO’s)
Let’s take a look at each of these options, only one of which really makes any sense for retirement investors.
Investing in Virtual Coins – The way to go with an IRA
This is probably the most common approach. Your IRA LLC or Solo 401(k) can establish an account with an exchange that trades virtual currencies. The IRA can then contribute dollars to an account with the exchange and engage in trading activities. From a mechanics perspective, this is very similar to foreign exchange trading between, say US Dollars and Euros, Yen, or Yuan. There are many strategies that can be deployed for long term buy and hold, monthly purchase cost-averaging, or short-term fluctuation-based trades. Some exchanges even allow for the use of margin or put/call techniques, though this can get tricky in the IRA/401k space where such debt-instruments must be non-recourse and can create exposure to UDFI taxation.
When trades are executed on an exchange, the acquired coins are then stored in a virtual “wallet” that is essentially a distinct URL with an encryption key. There are wallets held by the various exchanges, 3rd party cloud wallet services with enhanced security features and even offline physical wallets in the form of a portable hard drive or USB stick.
Selecting one or more exchanges to work with and a type of wallet can be complex. There are many exchanges to choose from, with some of the more common available to US investors being Coinbase, and Kraken. As you research exchanges, you will want to ensure they can serve you. Not all operate in the US and there are a few that operate in slightly less than all 50 states for regulatory reasons. You will also want to understand what registration requirements are necessary to achieve a suitable “tier” for the type of investing you wish to do. It can take a good bit of documentation as well as some trading history to be able to work with a substantial amount of US dollar equivalency. Some exchanges handle a small set of more established coins such as Bitcoin, Etherium, Litecoin and Ripple, while others provide access to newer specialty coins like Tron and Waltoncoin.
Investing in Coin Mining
In the case of Bitcoin and many other virtual currencies are created via a process known as “mining”. This is a process whereby transactions are verified and added to the public ledger known as the block chain. By dedicating computer resources to verify and bundle coin transactions into a new block and then solving a math problem as “proof of work” a miner earns new coins.
There are various ways to participate in mining, from acquiring specialized computer hardware connected to the internet to purchasing shares of a mining company.
Unfortunately, mining activities are not well suited as investments for an IRA or Solo 401(k) plan. The issue is that in the IRS 2014-21 notice, mining is identified as a trade or business activity. As such, engaging in such investments will expose a retirement plan investor to UBIT taxation and corresponding trust tax rates potentially as high as 39.6% on the gains.
While Coin mining reasonably secure, it is an activity better suited for non-retirement funds where tax rates will likely be lower.
Investing in Initial Coin Offerings
Initial Coin Offerings are effectively crowdfunding mechanisms deployed in the virtual currency space. Entrepreneurs planning a new venture associated with a virtual currency put forth a business plan and solicit investors to participate via a purchase of a newly issued coin. The hope of investors in such ventures is that the coin in question will become worth more if the project achieves success.
There have been several notable successes in the ICO space, most notably the virtual currency Etherium and its corresponding block chain platform for executing smart contracts. In 2014 the Etherium project raised $18 million USD equivalent in Bitcoin resulting in an initial coin price of $0.40 per Ether. The project went live in 2015 and the value of Ether went as high as $14 in 2016. Ether is currently trading at approximately $300 per coin.
Likewise, there have been some abject failures and outright fraud in the ICO space. This is an unregulated domain and not subject to the same reporting requirements that a US based crowd funding venture needs to comply with. So, while ICO’s may be a disruptive way to promote innovation, they are also highly speculative and risky, with no regulatory backstop or means to pursue remedy in the event of fraud.
In September 2017, the Chinese government officially banned ICO’s and prohibited exchange and banking services tied to such ventures. ICO’s are still available on non-Chinese platforms.
Such investments should be approached with great caution or avoided altogether.
Investing in Virtual Currency “Funds”
Several industry players such as the Winklevoss twins have attempted to gain regulatory approval for publicly traded virtual currency ETFs. Such a request was denied by the SEC in the spring of 2017 and to date no venture has had success at this level.
There are various private funds promoted via channels such as the internet. This is an unregulated space and something that should be approached with extreme caution. The SEC has identified and prosecuted Ponzi scheme operators and other fraudulent actors in this space.
We recommend against such investments.
As Always… Do Your Homework
Virtual currencies are a rapidly developing space in the investment world. There are many unsolved regulatory questions and limited oversight relative to more conventional asset classes. That said, there is a huge amount of potential and for investors with the ability to gauge and accept risk, there may be continuing opportunities for significant returns. If you choose to pursue a strategy of investing in cryptocurrencies such as Bitcoin or Etherium, take the time to learn about the tools necessary to get your IRA or 401(k) dollars into the space and secure your holdings with a robust wallet. Due to the high levels of uncertainty, volatility, and risk, we suggest you not invest any capital you are not willing to lose.
What our clients says about us
Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
