In 2014, the IRS released IRS Notice 2014-21, which determined that cryptocurrencies are classified as property for federal tax purposes, rather than as currencies.
Like any property, buying or selling of cryptocurrencies are subject to capital gains tax. If you buy bitcoin at $10,000 and it rises to $60,000, you’ll be taxed on your capital gain of $50,000.
If you bought that bitcoin within your solo 401k plan, it wouldn’t matter if the price rose to $1 million. You wouldn’t have to pay any taxes on your gains. And if you bought it through a Roth solo 401k, you won't have to pay any taxes when you withdraw in retirement either.
For these reasons, buying cryptocurrencies in a solo 401k is not only possible, it can actually be a good idea.
Yes. While the IRS doesn’t specifically state that a solo 401k is allowed to buy and sell crypto, it’s still considered allowed because it’s not listed as a prohibited investment.
With a solo 401k, you get full control over what assets you invest in. The IRS doesn’t provide a list of what’s allowed. Instead, they only list a few things that aren’t allowed.
Crypto is not on that list.
A solo 401k has many benefits and tax-advantages. Here are a few that apply even stronger when you're using the account to invest in crypto.
The biggest advantage is the Roth option. With a Roth solo 401k, you use after-tax dollars to contribute to your account. Because the money you put in was already taxed, withdrawals are completely tax-free in retirement.
Since crypto is one of the most volatile asset classes, and gains can potentially be much larger, holding that crypto in a Roth solo 401k makes it sheltered from taxes. Even if your crypto grows 10,000x, the entire amount is yours.
With a solo 401k, you don't pay any taxes when you buy and sell assets. In other words, your money compounds tax-free.
If you're buying and selling crypto in your account, you don't have to 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.
The solo 401k has the highest contribution limit of any retirement account. In 2022, the contribution limit is $61,000 ($67,500 if you're over 50).
Only $20,500 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 $61,000 limit entirely into a Roth account.
Contributions and rollovers are treated differently. Rollovers do not impact your contribution limit. The best part about rollovers is that there's no limit on how much you can rollover. You can transfer all of your funds from other retirement accounts into a solo 401k.
Having full control over what you invest in is what allows a solo 401k to be able to invest in crypto in the first place.
To buy cryptocurrencies with your solo 401k, you basically just need to open a separate account at a crypto exchange under your solo 401k trust.
Here's how it works.
If you already have an active solo 401k account, you can probably skip steps 1 to 3.
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.
Not all solo 401k providers offer the same things. If you’re planning on buying crypto through your account, make sure that the plan has a Roth option, and the ability to do rollovers.
The Roth option lets you withdraw from your account tax-free in retirement. This is the account you want to buy your crypto in.
Rollovers are the fastest way to fund your solo 401k because you can transfer in funds from another retirement account.
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.
This is where rollovers come into play.
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.
Any rollovers from a Roth account will get put into your Roth solo 401k account, and ideally, you would use this account to purchase your crypto.
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 them separate.
Once the accounts are made with the 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. This is a very serious matter to pay attention to and penalties can be extremely steep for breaking the rules. For example, your solo 401k crypto cannot be sent to your personal account for any reason as that would be a prohibited transaction.
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 everything separate from each other. For example, if you buy a hardware wallet, that wallet 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 with each other.
It entirely depends on the exchange's application process. Usually, it takes a few weeks, since most exchanges require you go through a vigorous verification process.
You're free to buy whatever cryptocurrencies you want. You are not just limited to bitcoin and Ethereum.
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.
Your solo 401k trust owns the crypto in your account.
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 be a prohibited transaction.
It's 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%.
Ocho is currently in development and will launch at the end of 2022
Sign up below to get early access when we launch!