Bitcoin and the Check Book IRA LLC
By Jordan Sheppherd
Unless you’ve been living under a rock for the past few years, you’ve probably heard of something called Bitcoin, perhaps digital currencies, crypto-currencies, or all of the above.
Perhaps it piqued your interest, and you watched any one of seven or so documentaries that have been made on Bitcoin specifically, or crypto-currencies in general. Bitcoin: The End of Money as We Know It, released in 2015 looked at the early days of Bitcoin, its mysterious inventor, Natoshi Nakamoto, and the disruptive nature its advocates hope it will have on traditional monetary systems.
It’s worth the watch, but a better documentary to better understand how digital currencies work, is The Rise and Rise of Bitcoin, released in 2016.
So, what is a digital currency? If this is all new to you, the best place to start is probably this page, entitled Still Don’t Get Bitcoin? Here’s an Explanation Even a Five-Year-Old Will Understand. Not that I’m calling you a five-year-old, mind you.
Instead of me trying to explain things like peer-to-peer systems, and block-chain technology, just go read through that short and sweet explanation of how digital currencies work.
Let it sink in for a moment.
At its core, Bitcoin is a way for people to exchange a certain number of Bitcoins or any other digital currency, which are digital bits, without having a third party standing in the middle, like a bank. And it’s a system that uses something called block-chain technology to ensure and confirm that the transfer of those digital bits was legitimate.
No bank? No credit card merchant company? No PayPal? Yes. You can see why proponents of digital currencies tend to be of the Libertarian mindset. The idea of two parties being able to exchange value, without a third party, in a verified transaction that can take place instantaneously, and for any amount, appeals to those who view, with a suspicious eye, central banks and their debt-based fiat currencies.
You can also imagine the opponents of Bitcoin et al, decrying digital currencies in general for any number of reasons. Jamie Dimon, the CEO of JP Morgan Chase just last week stated that Bitcoin is “…worse than tulip bulbs. It won’t end well. Someone is going to get killed.” The internet’s response was not so kind. Everyone from Forbes to the New York Times responded to Mr. Dimon’s obviously ignorant opinion on the subject.
Enough of that though. The real question here is, can you buy Bitcoin with IRA or 401(k) funds? The answer is yes.
In March of 2014, the IRS released Notice 2014-21 in which it ruled that digital currencies (so-called) are not considered currencies, but capital assets. That means any gains from the sale of digital currencies could be subject to capital gains, given the time the currency was held. More to the point here though, the ruling means that it is legal for a retirement account to own and hold Bitcoin and other digital currencies.
Prior to 2014, some people claimed that digital currencies would be considered some sort of collectible, and would be prohibited by IRC 408(m). Retirement accounts can’t own collectibles defined in that section of the tax code, and so digital currencies were by extension prohibited, argued these people. It was a thin reed even then, but those of an extra-cautious bent needed some sort of guidance from the IRS, and in March 2014, they got it.
So, the next question is: should you buy Bitcoin or other crypto-currencies?
Meh. Since we’re not investment advisors, I’ll keep my mouth closed on that one.
If you do decide to buy Bitcoin or some other crypto-currency, you’ll have a lot easier time of it with an IRA LLC or especially a Solo 401(k). Why? Because as either the Manager of your IRA LLC, or the Trustee of your Solo 401(k), you’ll be in a position to directly make the purchase of one of these currencies, instead of having to go through a third party, such as a Custodian or someone like Bitcoin IRA.
One caution though: If you do decide to invest, make doubly, triply, and quadruply sure that you understand the ins and outs of holding, storing, and keeping safe your retirement account’s Bitcoins. With great power comes great responsibility, and this is no different.
And finally, prepare to ride some highs and lows. Digital currencies in general are enormously volatile. They are 5 times as volatile as the S&P 500 and over 500 times as volatile as gold. So, steel those guts, and prepare for a ride, because you’re going to feel as if you’re on the Magnum roller coaster at Cedar Point.
And even though we’re not advisors, it should go without saying that one should never put their eggs in one basket.
Aloha Jordan, Aunty here, in Honolulu.
I have an account opened through BitcoinIRA – and indeed the initial fee is very high, but for someone lazy and hands off like me, it is okay. Even though I don’t completely trust and/or believe in the future of Bitcoin/digital currencies, it is a way of diversification and makes great conversation at gatherings (lol!)
Since then, I have been approached about another potential investment using my checkbook IRA LLC. Can it buy into a MLM network marketing position that deals with Bitcoin software algorithms/payouts/etc? Specifically a company called USI-tech. An initial investment is made, and then we let it ride. Since it is a MLM, do I just stay at the bottom and not enroll others, or can my LLC enroll other people?
Aloha Aunty,
Not sure about the MLM investment. Without knowing more about it, I’d say you’d probably be on shaky ground. From what I know of MLM stuff (which is very little), making a profit generally depends upon your ability to either sell a product to people or in some other way bring them into the MLM operation. Because its your IRA funds, it seems to me that the IRA LLC’s investment would be dependent upon your activities and work, which exactly what you don’t want.
I would see it the same as a person who buys a house with the IRA LLC, puts a bunch of sweat equity into the property, and then sells the property for a profit. The profit was only made possible by the IRA owners efforts and work. Not an exact analogy, but that’s just my two cents.
Jordan, good 2 cents, mahalo!
Hello Honolulu Aunty,
Even though cryptocurrencies as a whole are not scams, there are scams and ponzis within them. They appear to be taking advantage of the gold rush mentality going on in cryptos right now, as well as the desire of some of us to catch up on our retirement savings by making large gains in a short period of time, to try and divert our investments away from legitimate cryptos and into their schemes. Unfortunately, in my (and others’) humble opinion, you found one of those… or — as you say — one of them has evidently found you.
The YouTube channel ‘jsnip4’ has published documented cases against several of these, including USI-tech. Evidence includes items such as, actual investments which cannot be recovered (BitPetite), fake company addresses, incomplete corporate documentation, weasel clauses in the member agreements stating their websites may go offline for ‘maintenance’ indefinitely and never return, etc. Other names in his list of ponzis or outright scams include: BitPetite, BitConnect, and LaserOnline.
They all have similar patterns and promises, such as needing to ‘borrow’ your dollars/Bitcoin, promising to pay 1% “interest” *per day* or similar (which can’t be legitimate… as you’d own the wealth of the entire planet in less than two years), jacked-up ‘lifestyle’ videos which show alleged ‘customers’ spending their newfound riches on Gucci handbags, but which reveal nothing about the underlying mechanisms or technologies which would allow them to actually invest your money and yield such fantastic returns. The only differences between the various schemes are often the front people; the timeframe (some shorter, some longer); the # of levels, in MLM schemes; and the excuse they give you as to why they need to borrow *your* money (e.g., a ‘special trading algorithm’).
Caution: some of these may even have the same criminal gangs behind them… and once they get your personal info they may even try to clean out your Bitcoin or crypto wallets, after they’ve already taken all of your money you’ve invested with them. It’s not out of the realm of possibility that the same criminal groups are running more than one of these popularly known outfits. Using two-factor authentication for your crypto wallets should cut down on their ability to rip you off but, better to not even take the chance.
The worst part? At some point, when all of this blows up I fear this is going to be used by demagogues to tar the rest of the cryptocurrency world… and to argue that heavy-handed regulation will be ‘needed’ for our ‘protection’. Don’t give them that excuse!
Good luck
Aloha again, Jordan!
IF digital currencies become reclassified from “property” to currency, will I still be able to own them in my IRA?
btw, BitcoinIRA has been very good for me, in spite of their high fees, because Bitcoin, Ethereum and other digital currencies have been on a upward ride. Their transaction times are rather slow, so a sale or purchase takes days to finalize, but it seems to be the only game in town for speculating with my IRA.
I did try to open other digital currency wallets with my checkbook IRA LLC, but the few options available for me in Hawaii do not allow entities or businesses to open accounts. For security reasons, they want individuals with ample proof of their residence (utility bill) and government issued identification (passports or State IDs).
This has been a great learning experience – thanks for first bringing it up and initiating the spark with your post and mention of BitcoinIRA!
Hey Aunty,
If these cryptocurrencies were to be reclassified, which I don’t think they will, it wouldn’t change anything in regards to being able to invest in them with an IRA or Solo 401(k).
I’m glad Bitcoin IRA has worked well for you. For opening institutional accounts for cryptocurrencies, you can try ItBit or Gemini.
Upfront disclaimer: This is not investment advice, just my personal opinion, and you should NEVER invest more than you can afford to lose. That said, I’ve been investing in the cryptoasset space since April of this year with personal funds. I would say it takes at least 6 months (working pretty much full-time) and lots of self-education (good courses on Udemy, I recommend Michael Suppo) and trading to BEGIN to get a some kind of handle on the markets. The learning curve is infinite, a rabbit hole with no bottom, but worth pursuing if you’ve got the interest, the grey matter and the time. Using a conservative (investing) vs active (daytrading) philosophy, and learning as I go, as of today I’m up about 20% over six months, not phenomenal, but nothing to sneeze at. 2017 has been the year of bitcoin, but we are still in the first or second inning of the development and actualization of other blockchain applications, other things in development NOW that will be transformational in the next few years. My checkbook IRA and self-directed LLC are finally in place and up and running, really looking forward to taking advantage of the opportunity to invest a portion of my retirement funds (tax free, as taxes are going to be a huge and controversial issue for ordinary investors) in cryptoassets. Long post, but there there will be generational wealth opportunities in the next 3-5 years. Many thanks to Jordan, Alisha and everybody else at Check Book IRA for making this possible!!
Honolulu Aunty – a strong word of caution on USI tech: They have no working customer service. I sent bitcoin to them and it got “stuck” – I could not buy their product – packages and I could not get my bitcoin returned. 9 days of daily website requests for assistance with nothing more then a canned answer, that they would get with me in 24 hours. 2 calls to their “World class Customer Service” were answered in India by men who could do nothing but fill out another request. Finally on the 10th day I was able to withdrawal my funds. What USI tech has is very good marketing.
Mahalo for the note of caution, Pamela D. Sorry you had such a problem with them.
I am 50/50 about USI-tech, but am testing it for myself before I recommend it. The big push is to “re-buy” packages with the 1% daily payouts, but instead of doing that, I am not doing any re-buys and instead allowing the earnings to gather in the wallet, and I then withdraw them out to another account. It has been over a month, and so far, so good. As a result of this, I will invest more into it and take the payouts until all of my principal has been withdrawn, and also the 40% that will be earned.
Jordan,
How may we hold bitcoin that is owned by our Self Directed LLC?
Hey Pam,
There are a few exchanges that offer institutional accounts, which means you can open an account in the LLC’s name. Gemini is one, and the other is ItBit. If anyone knows of others that offer institutional accounts, chime and let everyone know.
You can open an account in the LLC’s name, and tie it to the LLC’s bank account. From there you can move whatever you want over to the exchange and purchase the digital currency. As far as holding it goes, you can hold it on an exchange, or have your own wallet. I’m not entirely up to speed on an off-exchange wallet, but its certainly fine to have one.
Thanks Jordan! This is timely information.
It appears that on busy exchanges such as Coinbase or Gemini, where they haven’t hired anyone to answer the phones and the only help you receive is either automated or via email, signing up for an institutional account is slow with many back and forth email-driven delays, and may take months! Whereas, signing up for a personal account is automated and takes almost no time at all (as long as nothing goes wrong).
Hi Jordan,
Just found your website – thank you for the great info on Solo 401Ks!
For a Solo 401K, would the account type at a crypto exchange have to be set up specifically as an “institutional” account? Or can it just be a regular account as long as funds are EFT’d from the 401k checking account and the cryptocurrency is stored in a wallet specifically for the 401K only?
As an alternative to opening an account with an exchange, Is it allowed to withdraw cash from a Solo 401k checking account, buy bitcoins on localbitcoins.com, and then have the bitcoin saved in a wallet specifically designated just for the Solo 401K?
Thanks!
Hey Rosemary,
This answer depends on you being the Trustee of your own Solo 401(k) plan. I only mention that because not all Solo 401(k)s are set up that way.
If you’re the Trustee, its always best to open an institutional account, so that any tax reporting is made using the 401(k)’s name and EIN. Having said that, its also fine to set up a regular account, tagged with the 401(k)’s name, and tie the 401(k)’s checking account to the exchange account.
I don’t know much about localbitcoins.com, but it sounds like it would work like what I said in the previous paragraph.
***Anyone reading this comment who has an IRA LLC – completely disregard what I said above. If you have an IRA LLC you have to set up an institutional account in the LLC’s name. Those of our clients who have a Solo 401(k) and are their own Trustee are in an entirely different legal position when it comes to holding title to the retirement accounts assets***