Blog of Jeff Vandrew Jr, Attorney-CPA
Many of my clients want to hold Bitcoin in an IRA or 401(k). However, most of the “Bitcoin IRA” companies out there (BitcoinIRA, Kingdom Trust, BitGo, Regal Assets, etc.) charge large custodial fees for doing so.
Wouldn’t it be great to avoid all these issues by just holding cryptocurrency directly, in control of your own private keys, while still maintaining the tax benefits of an IRA or Roth IRA? This would allow you to cut out all of those middleman fees.
It turns out there is a way to do this, so long as you know how to avoid the hidden traps.
A question I often receive is whether clients holding Bitcoin or other cryptocurrency are required to file Form FinCen 114 (colloquially called the “FBAR”).
Unfortunately, as with many cryptocurrency tax issues, the answer isn’t fully clear.
One of the most powerful tools you can use in retirement is a Self-Directed IRA. More specifically, a Self-Directed IRA with Checkbook Control takes this strategy even further, allowing you access to any investment you choose without needing approval from a custodian.
But even with access to “any asset you choose”, there are still three sets of IRS rules that you must follow. Keeping these rules in mind when using a Self-Directed IRA with Checkbook Control is even more important, since there isn’t a third party looking over your shoulder to monitor what you’re doing.
The three sets of rules (plus an extra one for Texans) are:
- The Prohibited Transaction Rules
- The UBIT Rules
- The Collectibles/Life Insurance Rules
- The Texas Franchise Tax Rules (in Texas Only)
I’ll address each set of rules in turn. (Quick note: If your self-directed IRA uses a trust instead of an LLC, all the same rules apply. The same rules also all apply to 401(k)s.)
Has cryptocurrency become too large a portion of your portfolio for comfort? Have you been delaying diversifying a portion of your holdings due to the large capital gains taxes that would result? If so, a cryptocurrency charitable remainder trust may be for you.
The sale or exchange of cryptocurrency creates capital gains income. If the cryptocurrency has been held for over a year, this is taxed at 15 percent, 18.8 percent or 23.8 percent, dependent upon total income. You can try to to spread sales over many years,in order to “soak up” the maximum amount of income into the 15 percent and 18.8 percent brackets, however it’s really only practical to spread sales over a few years at most.
There is a better solution. [Read more…] about Defer Your Cryptocurrency Taxes Using a CRUT