How To Invest In Crypto Through A Solo 401k Plan

Open a solo 401k plan online in under 10 minutes – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a mega backdoor Roth conversion with a few clicks.

In 2014, the IRS released IRS Notice 2014-21, which determined that cryptocurrencies are to be classified as property for federal tax purposes, rather than as currencies. Like any property, buying or selling of cryptocurrencies are typically subject to capital gains tax. For example, if you buy bitcoin at $10,000 and it rises to $60,000, you’ll be taxed on your capital gain of $50,000.

Retirement plans like a solo 401k compound tax-free, meaning you don’t pay any taxes on capital gains. In a pre-tax solo 401k, taxes are deferred until you withdraw in retirement. In a Roth solo 401k, withdrawals are tax-free. Therefore, buying cryptocurrencies in a solo 401k is not only possible, it can actually save you a lot of money on taxes (especially if your investments “go to the moon”).

Can I buy cryptocurrencies in a solo 401k?

Yes, you can invest in cryptocurrencies through a solo 401k. While the IRS doesn’t specifically state what a solo 401k is allowed to invest in, it’s considered an allowable investment because it’s not listed as a prohibited investment. 

Buying crypto through a traditional solo 401k vs Roth solo 401k

Understanding the difference between traditional and Roth accounts is especially important for volatile assets like crypto.

Within a solo 401k plan, some plan providers will give you two different accounts: The traditional pre-tax solo 401k and the Roth post-tax solo 401k. You get to decide which account you want to buy crypto through.

With a traditional pre-tax solo 401k, you make contributions with pre-tax dollars (income you haven’t paid taxes on yet) and receive a tax deduction for the tax year. Your investment profits get tax deferred, and when you make withdrawals in retirement, they get taxed as ordinary income.

With a Roth post-tax solo 401k, you make contributions with post-tax dollars (income you’ve already paid taxes on) and receive no tax breaks for contributing. However, withdrawals in retirement are completely tax-free, no matter how large your gains may be. For example, if you bought bitcoin at $100 and sold at $50,000, you would owe zero taxes on your gains.

The advantages of buying crypto through a solo 401k account

Here are some of the best reasons to buy crypto in a solo 401k.

Roth option

The biggest advantage of buying crypto through a solo 401k is the large Roth option. You can contribute up to $23,000 into a Roth solo 401k for 2024, or up to $30,500 if you’re at least 50 years of age. That’s over 3x higher than the contribution limit of a Roth IRA.

With a Roth solo 401k, you get to withdraw your earnings tax-free in retirement. Since crypto is one of the most volatile asset classes, and gains can potentially be much larger than other traditional asset classes, holding crypto in a Roth solo 401k shelters you from taxes. Even if your crypto investments grow 100,000x, the entire amount is yours with zero taxes owed to the IRS.

Tax-free compounding

With a solo 401k, you don’t pay any taxes when you buy and sell assets. Reporting all your trades can be a headache for even advanced level traders with more sophisticated tracking tools. If you’re buying and selling crypto in your account, you don’t have to report individual trades, or pay capital gains tax every time you decide to sell for a profit. All the profits are yours to invest in other crypto projects or into other asset classes besides crypto.

High contribution limit

The solo 401k has the highest contribution limit of any retirement account. In 2024, the contribution limit is $69,000 ($76,500 if you’re over 50). Only $23,000 of that can be contributed into a Roth solo 401k. However, there’s also the mega backdoor Roth solo 401k which allows you to contribute up to the $69,000 limit entirely into a Roth account.

Unlimited rollovers

You can rollover assets from other retirement accounts that might not let you invest in alternative assets like cryptocurrencies. You can rollover funds from any retirement account into a solo 401k plan, except from a Roth IRA. The best part about rollovers is that there’s no limit on how much you can rollover, and they don’t affect your annual contribution limits.

Investment freedom

A solo 401k lets you invest in any asset class, including alternative assets. However, this feature is only available with premium self-directed solo 401k plans. Free or low-fee solo 401k plans offered by major banks and institutions do not allow investments into alternative assets like crypto.

You can compare the best solo 401k plan providers here.

How to buy crypto with a solo 401k

To buy cryptocurrencies with your solo 401k, you need to open a separate account at a crypto exchange under your solo 401k trust. If you’re a Carry user, we lay out all the steps for you and can guide you through the entire process. Here’s how it works.

If you already have an active solo 401k account, you can skip steps 1 to 3.

1. Open a solo 401k account.

As long as you have any type of self-employed income and no full-time employees that work over 1,000 hours per year in your business (besides your spouse), you’re eligible to open a solo 401k. Opening an account is simple. Find a solo 401k provider, get an Employer Identification Number from the IRS, and fill out the application form.

As mentioned earlier, not all solo 401k providers offer the same features. If you’re planning on buying crypto through your account, make sure that the plan allows investments into alternative assets (this is usually only available on paid solo 401k plans). You can compare solo 401k plan providers here.

2. Open bank accounts under your solo 401k trust

Any cash and/or assets you hold in your solo 401k belong to your solo 401k trust. This is a separate entity from you and your business. To separate all transactions and assets from you and your business, your solo 401k trust will have its own EIN and open its own bank accounts. Typically, you’ll have to open two different accounts: One for your traditional solo 401k and another for your Roth solo 401k.

For example, here’s how it works with the Carry Solo 401k.

3. Fund your solo 401k account

Once you open your solo 401k account, you can fund it by making contributions to it or by doing a rollover. If you have another retirement account, you can rollover the entire amount into your new solo 401k.

The benefits and tax-advantages of a solo 401k make it a superior retirement account than most other plans that you might already have. Additionally, rollovers to a solo 401k do not count towards the yearly contribution limit. You can rollover as much as you have in another account, and still have the full contribution room left over to add additional funds.

4. Open an account at a crypto exchange under your solo 401k trust

Remember that you and your business are separate entities from the solo 401k trust. The entity buying the crypto will be your solo 401k. Therefore, you must open an account with a crypto exchange under the solo 401k trust.

If you’re only going to invest through your Roth solo 401k, then you only need the one exchange account. However, if you’re also going to be buying crypto through your traditional solo 401k account as well, then you’ll need to open an additional crypto exchange account to keep investments from each account separate from one another.

5. Buy and sell crypto

Once the accounts are created with a crypto exchange, you can fund your exchange account through your solo 401k bank and start buying and selling coins.

Remember not to mix any of the crypto purchased by your solo 401k with your personal accounts. For example, your solo 401k crypto cannot be sent to your personal account for any reason, as that would be considered a prohibited transaction by the IRS.

What’s the difference between investing in crypto through a solo 401k vs a self-directed IRA?

There’s been a rise in special self-directed IRA accounts that let you invest in cryptocurrencies. However, there are some major differences between investing in crypto through self-directed IRA and a solo 401k.

FAQ

Can I move my crypto to another exchange or another wallet?

Yes, you’re free to move your crypto to any other wallet or exchange. Some people will want to put away their crypto in cold storage and others might want to transfer it to a self-custodial wallet to get access to more cryptocurrencies not available on an exchange.

Just make sure to keep all transactions (even offline transactions) separate from each other. For example, if you buy a hardware wallet, it must be purchased by your solo 401k trust, not you. If you opened two exchange accounts, one for your traditional solo 401k and another for your Roth solo 401k, make sure that crypto in these accounts never get mixed.

How long will it take for me to buy crypto with a solo 401k?

It entirely depends on the exchange’s application process. Usually, it can take a few weeks since most exchanges require you go through a lengthy verification process.

Can I buy whatever crypto I want or are my choices limited?

You’re free to buy whatever cryptocurrencies you want. You are not just limited to bitcoin and Ethereum. Once you deposit your funds through an exchange, you’re free to move the funds around in different block chains and DeFi projects and invest in whatever protocol or token you like.

Can I buy NFTs with my solo 401k?

The IRS has released new guidelines that state NFTs will be treated as digital assets, the same way that cryptocurrencies and stablecoins are treated. Learn more about solo 401k NFT purchases.

Who owns the crypto when I buy it through a solo 401k?

Your solo 401k trust owns the crypto in your account.

I already have a personal account with an exchange? Can I just use that?

No, your personal account is for your personal use only. Your solo 401k is its own entity and must make transaction through its own account.

In addition, the two accounts must never transact with each other. If you’re short a few hundred dollars and decide to borrow the funds from your solo 401k’s crypto wallet, that would also be considered a prohibited transaction.

Can I use my solo 401k for crypto mining or staking?

Mining and staking are a bit of a grey area. To stay on the safe side, activities like crypto mining and staking should be avoided with retirement accounts. Depending on the kind of mining and staking you participate in, they could be viewed as business operations and you could be hit with an UBIT (Unrelated Business Income Tax), which can be as high as 37%.

Also read: How To Invest In Cryptocurrencies & NFTs with a Retirement Account