Crypto in the Solo 401k
Can my retirement account own crypto?
Yes. Cryptocurrency and other crypto assets are allowed inside of retirement accounts, similar to gold, real estate, stocks, bonds and ETFs.
IRS on cryptocurrencies
In notice 2014-21 released on March 25, 2014, the IRS indicated that treatment of cryptocurrencies would be similar to property (e.g. real estate), rather than currency.
The notice stated that “virtual currency is treated as property for U.S. federal tax purposes.” In addition, they stated that "general tax principles that apply to property transactions apply to transactions using virtual currency,” referring to the profits made from selling virtual currencies.
In other words, the IRS will charge capital gains taxes on any profits made by selling crypto assets, either short-term capital gains (treated as ordinary income) or long-term capital gains (generally 15-20% if the asset is held longer than twelve months).
IRS on crypto assets in your 401k
The IRS doesn’t tell you what you (or your retirement account) can invest in; the IRS prefers to tell you what is prohibited.
Both section 408 and section 4975 of the Internal Revenue Code (IRC) detail what types of investments and what type of persons are prohibited from transacting with the retirement account.
Prohibited transaction rules are designed so that neither the participant nor the retirement account can benefit from the other’s involvement.
A disqualified person is defined in IRC Section 4975(e)2 and generally includes:
- The 401k plan participant (you)
- Your spouse
- Your parents and grandparents
- Your children and grandchildren
- Business or entity you (or your spouse) own or have a controlling interest
- Business or entity your parents own or have a controlling interest
- Business or entity your children own or have a controlling interest
Since the IRS considers crypto assets to be a capital asset, similar to real estate or stocks/bonds, the retirement account is allowed to buy, sell and hold crypto.
Using your Solo 401k to invest in crypto
Crypto assets are purchased from a cryptocurrency exchange. These exchanges are highly regulated as they are the “on ramp” from fiat currency (e.g. dollars, pounds, yen, etc) to crypto assets.
You can open a crypto exchange account in the name of your Solo 401k trust or through a special purpose LLC. (A special purpose LLC, which is similar to an IRA LLC in structure, would first need to be established by you and connected to your Solo 401k).
- The crypto exchanges Gemini and Kraken will allow you to open a crypto exchange account in the name of your Solo 401k trust
- For all other exchanges, you’ll open an account in the name of the special purpose LLC
To invest in crypto assets in your Solo 401k
- Set up and fund the Solo 401k
- Open an exchange account to buy crypto assets
- The crypto exchange account will be in the name of your 401k trust (or the special purpose LLC described above)
- This should be a brand new exchange account. You cannot use a pre-existing crypto exchange account in your name.
- No personal funds are allowed in this new crypto exchange account, only retirement assets
- Keep records of all transactions as plan administrator of your 401k
Additional information for buying and storing crypto in your Solo 401k
- Use cold storage (offline hardware wallets). This reduces your exposure to hacking on cryptocurrency exchanges
- Only buy from reputable exchanges
- Never share your exchange login information or your private keys with anyone
- Never mix personal holdings with retirement holdings, online or offline