Cryptocurrency: How to Invest with Your IRA

June 02, 2020 Blog No Comment

Cryptocurrency has been available for cash investments for a while, so why should you now consider investing in this digital currency through a Self-Directed IRA with Preferred Trust Company? Because you can realize potential gains tax deferred or tax free (depending on the type of account) while diversifying your retirement portfolio from the conventional market with an asset that is inflation resistant. There are a few differences that you should be aware of when you invest with a Self-Directed IRA (SDIRA) versus the cash in your bank account. We have put together some guidelines on how the process works and answer some commonly asked questions. If you want to learn more about cryptocurrency basics first, you can brush up on them here.

Invest in Cryptocurrency with Your SDIRA

            Step 1: If you are not currently a Preferred Trust client, you need to open a Self-Directed IRA account. Depending on how you would like to invest in cryptocurrency, there are two routes you can take in the type of accounts you can open. If you are going to work with a cryptocurrency broker dealer you can open up a standard SDIRA. If you feel that you are knowledgeable and experienced (emphasis on experienced) enough to invest in cryptocurrency without the help of a broker dealer, you can open a checkbook LLC SDIRA account. You can reach out to Preferred Trust to learn more about how to get started with setting up a checkbook LLC SDIRA.

            Step 2: Rollover or transfer your assets from another qualified account and/or make a contribution to your account so you have funds to invest within your SDIRA.

            Step 3: If you are working with a cryptocurrency broker dealer, you will work in cohesion with the broker and Preferred Trust Company to purchase, manage, and store your cryptocurrency investments. If you are managing your investments through a check LLC SDIRA, then you can engage in a cryptocurrency exchange to buy, sell and store on your own terms.

Why invest through a cryptocurrency broker dealer?

Preferred Trust Company is not licensed to buy and sell cryptocurrency on your behalf, so one of your options is to work with a cryptocurrency broker dealer. The broker dealer will typically work with you to choose which type of cryptocurrencies fit your digital asset investment goals. Once you have made a decision, the broker will help direct your investment with Preferred Trust Company. The broker will purchase the digital currency on your behalf on the cryptocurrency exchange. You will be given the “public” key to your cryptocurrency asset, and Preferred Trust will be given the “private” key to be placed in “cold storage” at a secure location. Your asset will sit in cold storage until you direct your broker dealer and Preferred Trust Company to sell your asset on the exchange. The turn-around time to retrieve your asset from cold storage adds an element of delay, which could potentially affect the price your asset is sold on the exchange. As with any company you choose to invest with, you should perform your due diligence on the company prior to engaging in investments with them.

Why invest through checkbook LLC SDIRA?

For the more sophisticated investor, you may be interested in having the freedom to buy and sell cryptocurrency independent of a broker dealer. This would give you the flexibility to buy and sell more quickly, and you would avoid paying the extra brokerage commissions and fees. However, if you do not already have an LLC set-up for investing, there will most likely be a cost to set one up and carrying costs to maintain its LLC status. There is also greater responsibility on your part to ensure that you handle your investments per IRS regulations, including being aware of and not engaging in prohibited transactions. Once your checkbook LLC is created you are not limited to investing in cryptocurrency, the door is open to all alternative investments allowed within a SDIRA.

How is my cryptocurrency stored?

When you invest in cryptocurrency through a broker dealer, your “private” key will be stored through cold storage at an undisclosed depository, unbeknownst even to you, to provide another layer of security to your asset. When you invest through a checkbook LLC, it is up to you to store your asset in a safe place, whether it be hot or cold storage.

How is my cryptocurrency protected?

Your cryptocurrency assets are insured against hackers and theft, not market fluctuations.

What should I consider before investing in cryptocurrency with my SDIRA?

  • It’s a long-term investment. You must be willing to wait for the market to move.
  • The pros and cons of investing through a broker dealer or a checkbook LLC
  • Your tolerance for risk
  • Performing due diligence on the cryptocurrency broker dealer
  • Your knowledge of digital currency

For more education, you can review IRS Notice 2014-21 which describes how existing general tax principles apply to transactions using virtual currency. The notice provides guidance in the form of answers to frequently asked questions.

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