Investing in Options Using a Self-Directed IRA
Trading in short-term options has become a popular investment strategy for many investors using personal funds. However, a growing number of investors who have been dealing with a high short-term capital gains tax, have been looking for a more tax advantageous strategy. Enter the Self-Directed IRA. This article will explore how option trading works and explain how using a Self-Directed IRA can serve as a savvy tax advantage.
What is Option Trading?
Options trading gives one the right or obligation to buy or sell a specific security on a specific date at a specific price. An option is a contract that’s linked to an underlying asset, e.g., a stock or another security. Options contracts are generally good for a set period, which could be as short as a day or as long as a couple of years.
When one buys an option, you have the right to trade the underlying asset, but you’re not obligated to. If you decide to do so, that’s called “exercising the option.” When you sell an option, you must fulfill the contract. Selling options is where things get more complicated, and you could be at risk of losing an unlimited amount.
What is buying a call?
A call option gives one the right to buy an underlying security at a designated price within a specific period. The price one pays for the option is called the strike price. The end date for exercising a call option is known as the expiration date.
What is buying a put?
A put option is basically the opposite of a call option. Instead of having the right to buy an underlying security, a put option gives one the right to sell it at a fixed strike price. Put options also have expiration dates.
What is Short-Term Option Trading?
Options enable traders to leverage their bets on individual stocks. With an option, one gets the right, though not the obligation, to buy or sell shares at a set price by a stated date. In the past, options trading was seen as best left to professional firms with access to advanced trading tools and data. However, in the past several years, a new era of individual option traders has emerged focusing on short-term options.
According to a Wall Street Journal Article, shorter-dated options, expiring in five or fewer days, accounted for about half of all options-market activity as of August according to data provider SpotGamma, up from around one-third three years ago. Individual investors made up 27% of all activity in options as of June, up from 23% at the start of 2020, according to Bloomberg Intelligence. For popular one-day options tied to the broad S&P 500 index, individual investors made up around one-third of all trades, according to exchange-operator Choe Global Markets. Shorter-dated options bets have become so popular they have their own nickname, 0DTE, shorthand for zero days to expiration.
Taxation of Options
In general, if you are investing in puts or calls, the gains or loss from an option transaction is subject to the capital gains tax regime.
For long call options, if you close the position before exercising, the holding period of the option determines if it’s taxed at short- or long-term capital tax rates. Whereas if you exercise the option, the cost basis of the stock that is purchased is increased. There is no taxable event until the stock is finally sold. However, once the stock is sold, the holding period of the stock determines if the capital gain or loss is short- or long-term. For long put options, all the same rules apply as long call options, except that exercising a put option reduces the amount realized from the sale of the underlying stock by the cost of the put.
In the case of a short call option, if the option position is closed before the expiration period, regardless of holding period, the capital gain or loss is always considered short-term. Whereas if you exercise the option, the capital gain or loss is treated as short- or long-term depending on your holding period for the stock.
In addition, the amount you received for writing the option is added to the amount received from the sale of the stock. However, for a short put, the holding period for the stock begins on the date you buy it. If the put option is exercised and you buy the underlying stock, decrease the stock’s cost basis by the amount received for writing the option.
Taxation of a Self-Directed IRA & Roth IRA
The advantage of using a Self-Directed IRA to make option investments is that all gains are either tax-deferred or tax-free in the case of a Roth IRA.
The concept of tax deferral is prefaced on the notion that all income and gains generated by the pretax retirement account investment would generally flow back into the retirement account without tax. Instead of paying tax on the returns of an IRA investment, tax is paid only later, leaving the investment to grow unhindered.
Alternatively, when using a Roth, since contributions are made with after-tax money, all qualified distributions are tax-free. To be qualified, the Roth must have been opened for at least five years, and you must be at least age 59 ½.
Capital Gains & The Self-Directed IRA
As discussed earlier, gains from an option call or put would generally be subject to capital gains tax. The beauty of using a Self-Directed IRA to invest in short options, is all gains are not subject to tax. There is no need to worry about basis or holding period since all gains are exempt from all tax, including capital gains tax.
Are Options Subject to the UBTI Tax?
In general, almost all Self-Directed IRA investments that generate passive categories of income will not be subject to Unrelated Business Taxable Income (UBTI), such as capital gains, interest, dividends, royalties, and rental income. In 2023, the maximum UBTI tax rate is 37%. The good news is that option trading has been determined by the IRS not to be subject to the UBIT tax regime.
The IRS held that income or gains connected with short sales does not become subject to tax by the “acquisition indebtedness” rules contained in Section 514. They ruled that the borrowing of securities by the short seller does not create an indebtedness for federal income tax purposes. Similarly, the cash sale proceeds arising from the short sale are treated as sales proceeds and do not arise from an indebtedness.
Conclusion
Investing in options, especially short-term options, is risky and can produce quick losses. However, there is also the opportunity to generate significant gains. The major tax advantage of using a Self-Directed IRA or Roth IRA to invest in short-term options is that the gains are tax-free. There is no need to worry about one’s basis in the option or the holding period since all gains would not be subject to any ordinary income or capital gains tax. It is for this reason that many savvy option investors are self-directing their retirement instead of using personal or non-retirement funds.
Self-Directed IRA Real Estate vs. Capital Gains
One of the most common arguments against the use of a Self-Directed IRA to purchase real estate is that IRA distributions are subject to ordinary income tax, whereas a sale of real estate would be generally subject to capital gains tax. This article will explain the tax benefits of tax deferral for real estate investors and compare them to the tax treatment of using non-retirement funds to purchase real estate. In the end, it's up to you, the investor, to decide if a Self-Directed IRA for real estate is better than the capital gains tax treatment.
- Choosing whether to own real estate in an IRA or personally comes down to the individual investor
- Real estate owned in a Self-Directed IRA is not subject to tax until a distribution is taken
- Income generated from a personally-owned property is subject to tax, however, there are some advantages to doing so
What is Tax Deferral?
The primary advantage of using a Self-Directed IRA to purchase real estate (or any other investment for that matter) is the power of tax deferral. The U.S. retirement system is based on the power of tax deferral. Tax deferral is when all gains generated by a pretax retirement account investment flow back into the retirement account without tax. This allows your retirement funds to grow at a much faster pace than if the funds were held personally, allowing you to build for your retirement more quickly. This is also known as compounding interest, which Albert Einstein coined the 8th wonder of the world.
The concept of tax deferral can be best understood by way of an example. Let’s assume George invested $210,000 in 2016 to buy a home with his Self-Directed IRA. He rented the home out to a third party, and each year received $60,000 in rental income. After expenses and taxes, George’s IRA earned a net $25,000 of tax-deferred income. In other words, the $25,000 went back to the IRA each year without tax. In 2021, George sold the house for $490,000, which went back to his IRA without tax. This is one of the major benefits of using an IRA to buy real estate.
Taxation of IRA Distributions
In order to fully analyze the use of a Self-Directed IRA to buy real estate, it is important to examine the tax treatment of taking IRA distributions. An IRA distribution is when IRA funds are withdrawn from the IRA and transferred to the IRA owner for personal use. In other words, the funds are no longer in a tax-exempt retirement account.
All traditional IRA distributions are treated as earned income and are subject to tax. If you are under the age of 59 1/2, you may be subject to an additional 10% early withdrawal penalties. Once you reach that age, only taxes would be due on the distribution.
To determine the amount of tax due, the amount of the IRA distribution would be added to the IRA owner’s other income reported on IRS Form 1040. Additionally, once you reach age 72, you are subject to required minimum distributions. You must start drawing down your IRA with an approximate 3% withdrawal of IRA funds. This amount is also subject to ordinary income tax.
Taxation of Roth IRA Distributions
Unlike a pretax or traditional IRA, a Roth IRA is funded with after-tax money. Therefore, there is no immediate tax break. The major benefit of the Roth is that all qualified distributions are tax-free during retirement. To be qualified, you must be at least age 59 1/2, and have a Roth opened for at least five years. If these conditions are not met, any distribution of earnings is subject to tax and possible early withdrawal penalty. Bear in mind that contributions made to a Roth can be distributed at any time without tax or penalty.
The one drawback of the Roth is the income restrictions. If you earn too much money, you cannot directly contribute to a Roth-type plan. For 2022, if you earn more than $144,000 (filing as a single) or $214,000 (filing jointly) you cannot fund a Roth directly. However, you can utilize the Backdoor Roth strategy to get funds into the plan.
Lastly, unlike the traditional IRA, there are no required minimum distributions. You never have to withdraw from the plan if you don't need to. Instead, you can pass it, in full, to your beneficiaries.
Clearly, using a Self-Directed Roth IRA is the ultimate real estate tax strategy.
Buying Real Estate with Personal Funds
When one uses non-retirement, personal funds to purchase real estate, income from the real estate investment would be subject to ordinary income tax. However, gains from the sale of the real estate would be subject to capital gains.
Short-term capital gains is taxed at the ordinary income tax rates of the investor and is triggered if the asset is held for less than 12 months. If the asset is held for longer than 12 months, the investor would benefit from a reduced capital gains tax rate of 15% (or 20% for income above $501,000). Note – for high-income earners, the 20% capital gains tax rate is also subject to a 3.8% net investment tax.
Benefits of Using Personal Funds to Buy Real Estate
One of the major tax advantages of buying real estate is the concept of depreciation. Real estate depreciation is essentially an income tax deduction that allows a taxpayer to recover the cost of the real estate investment. In general, one can only take depreciation deductions up until the cost or basis in their property has been deducted.
The three elements needed to calculate the amount of depreciation is the investor’s basis in the property, the recovery period (the time period for which the depreciation is being claimed), and the depreciation method used. Since 1986, depreciation period for residential property is 27.5 years and 39 years for a commercial asset.
In other words, the benefit of depreciation provides the real estate investor with an annual deduction that can offset any income from the real estate asset. For example, rental property investors can include depreciation as one of the expenses on Schedule E when they file their yearly taxes.
In addition, Accelerated Depreciation is an accounting method that allows the owner of an asset to depreciate the asset more rapidly by using a shorter period of depreciation than the traditional straight-line method. For example, certain land improvements can be depreciated over 15 years at a 150% declining balance, with certain personal property depreciated over 7 or 5 years at a 200% declining balance.
One item to note which many real estate investors seem to ignore, upon a sale of a real estate asset, if depreciation has been taken than the investor must pay a higher tax on the depreciation recapture account. The depreciation recapture rate on this portion of the gain is 25%, which is still less than the highest ordinary income tax rate, but higher than the long-term capital gains tax rate.
Leverage & Real Estate Investments
The IRS imposes certain restrictions for Self-Directed IRA investors seeking to use a loan (leverage) to buy real estate. Firstly, the loan must be nonrecourse. That is, the loan cannot be personally guaranteed by the IRA owner. Second, a percentage of the income associated with the nonrecourse loan could be subject to an additional tax known as the Unrelated Business Taxable Income tax (UBTI or UBIT), which has a maximum tax rate of 37% for 2022.
Keep in mind, if you are self-employed and utilize the Solo 401(k) plan, there as an exception for UBTI. Arguably, for this reason alone, the Solo K is the best plan for real estate investors if you qualify.
On the flip side, when a real estate investor using personal funds uses a loan to buy real estate, the investor gains more purchasing power to increase returns.
For example, Valerie has $200,000 to invest in a real estate project. She purchases a $1 million property using 80% loan-to-value ratio, whereby she puts the $200,000 down and finances the rest at a 3.5% interest rate on a 30-year mortgage. Let’s assume that the property produces an annual net operating income of $65,000, she will be responsible for loan payments of $43,000 per year ($800,000 loan amount, 3.5% interest rate, 30-year mortgage), leaving Amy with a total cash flow of $22,000 ($65,000 in net operating income minus loan payments of $43,000). This results in a cash-on-cash return of 11% ($22,000 in cash flow divided by $200,000 of invested capital).
If Valerie invested the full $1 million in cash without a loan to purchase the property "unleveraged," the cash-on-cash return would have only been 6.5% ($65,000 in net operating income divided by $1 million in invested capital). Hence, it is clear why every real estate investor seeks to use leverage when purchasing real estate.
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Use a Self-Directed IRA or Personal Funds?
There is not really a correct answer as to whether one should use a Self-Directed IRA or personal funds to buy real estate. Just like tennis and pickleball: both are great games that involve a ball and racket but are still different sports with different rules. Most investors want to use IRA funds to buy real estate because they have available funds in their IRA and they wish to diversify their retirement assets away from equities. Below is a list of some of the advantages and disadvantages of using Self-Directed IRA vs. personal funds to buy real estate:
Self-Directed IRA Advantages to Buy Real Estate
- Diversification
- Take advantage of tax deferral or tax-free investing, in the case of a Roth
- Invest in hard assets as a hedge against inflation
Self-Directed IRA Disadvantages to Buy Real Estate
- Ordinary income tax and not capital gains tax treatment when taking a distribution (except for a qualified Roth IRA distribution)
- UBTI tax when using leverage (exemption for a Solo 401(k) plan)
Use of Personal Funds Advantages to Buy Real Estate
- Capital gains treatment on sale if held longer than 12 months
- Depreciation deductions
- Diversification
- Ability to use 1031 exchange to defer gains
Use of Personal Funds Disadvantages to Buy Real Estate
- Real estate assets held less than 12 months will be subject to ordinary income tax
- Limitation of depreciation deductions
- Depreciation recapture
Conclusion
Overall, whether an investor uses a Self-Directed IRA or personal funds to buy real estate, the ability to gain exposure to the real estate asset class has proven to be a wise investment over the years. As outlined above, each case has its advantages and disadvantages. Although, the ability to use a Self-Directed Roth IRA and, especially, the Roth Solo 401(k) plan seems to be the most tax advantageous.
For IRA investors, the ability to diversify ones retirement portfolio, as well as generate tax-deferred (or tax-free) gains are the main advantages. Whereas, in the case of an investor using personal funds, the ability to generate capital gains tax treatment and accelerated depreciation deductions are very attractive tax benefits.
The good news is that the IRS allows one to use personal or retirement funds to buy real estate, so we can all take advantage of the opportunity to invest; it's up to you to decide the best way to own it.
Can I Buy a Business with my Retirement Account?
Buy a Business with Your Retirement Account
IRA Financial has two great solutions that allow you to buy a business with your retirement account. Each of our solutions is a little different. The first solution is to use your IRA. The second solution is Rollover Business Startups (401k Business Financing). Despite the differences, each solution allows you to purchase a new or existing business with your retirement account.
Benefits of Using Retirement Funds to Buy a Business
Using your retirement funds to buy a business has multiple benefits. Although there are different ways to achieve this goal, some of the benefits of using your retirement funds to buy a business include:
Access to Capital: Unlike using a loan, using funds in your retirement account to buy a business does not require a waiting period, underwriting, or exposure to interest rates.
Starting a Business with no Debt: Starting a business with debt can be detrimental to the business's long-term health. However starting a business without having to take on debt can free up capital, reduce your stress, and allow you to give yourself the time and energy to help the business grow.
Tax Benefits: Depending on the structure and whether it's a new or existing business, there may be tax benefits to using your retirement funds to buy a business.
Using Your IRA to Buy a Business
If you plan to leave your job and you have an IRA or 401(k) retirement plan, why not use your IRA funds to invest in yourself? This is a much safer route than going into a volatile stock market you may not understand. Stop using putting your funds into traditional investments. Use your IRA funds for a business you can run, manage, and even earn a salary from. If you plan to invest in yourself and start a business, the ROBS 401(k) may be right for you.
Previously known as the Business Acquisition Solution (BACSS) at IRA Financial, you may already know the structure, but let’s briefly recap the foundation of ROBS 401(k) and how it can benefit you. With ROBS 401(k), a C Corporation is formed which will adopt a 401(k) Qualified Plan. Your existing retirement funds can then roll into the new 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. Finally, the new corporation will use those funds to purchase a new business or franchise tax-free!
With the IRS ROBS Solution, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions. Additionally, you can borrow up to $50,000 for any purpose. If you are over the age of 50, you can borrow up to $62,000.
Learn More: What is ROBS 401(k)?
Advantages of the ROBS 401(k) Solution
The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. These do not apply to a Self-Directed IRA structure.
How Does the Rollover Business Start-up or ROBS 401(k) work?
The Rollover Business Start-up (ROBS) arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsors, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.
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The following is how a typical Rollover Business Start-up structure works:
Business Start-up Structure
1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as the stock of a corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.
3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
4. Jim then directs the investment of his or her 401(k)-plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).
5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
6. The C Corporation utilizes the proceeds from the stock sale (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.
Related: Rollover as Business Startups Compliance Rules
ROBS 401(k) vs Self-Directed IRA LLC
The ROBS structure at IRA Financial is IRS-compliant. The ROBS is the only legal structure that individuals can use to invest retirement funds into a business they will operate and be employed by. As you may know, with a self-directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she is involved in. According to the Internal Revenue Code 4975, that is a prohibited transaction.
With a Solo 401(k), an individual can only borrow up to $50,000 or 50% of his or her account value (whichever is less). He/she can then use that loan for any purpose, including starting or financing a business. Notably, if an individual requires more than $50,000 for a business, then the ROBS is the only solution that will allow one to use their retirement funds to start or finance a business. You can start your business today tax and penalty-free!
Read More: Can I Use My IRA to Invest in a Startup?
Get in Touch
Do you have questions about using ROBS to buy a business that we did not cover in this article? Contact IRA Financial directly at 800-472-0646 and ask us your questions.
Did you know
Only the ROBS solution will allow you to use your IRA or 401(k) funds to buy a business or franchise. And it is the only legal way to use retirement funds to purchase a business or franchise from which you can draw a salary, without tax or penalty, which can help you to live your dreams.
Bitcoin Investing with a Self-Directed IRA
Bitcoin investing with a Self-Directed IRA has become increasingly popular over the last few years. Bitcoin was the first and perhaps most well-known cryptocurrency. Bitcoin was created in 2009 and has continued to grow in price since this period. Bitcoin was created by a person under the pseudonym Satoshi Nakamoto, who created Bitcoin, and authored a white paper focused on Bitcoin, which serves as the original reference for Bitcoin documentation.
Key Takeaways
- One can use retirement funds to invest in Bitcoin and other cryptocurrencies
- You must self-direct your IRA to be able to invest in alternative assets
- Depending on the exchange you use, you might need to set up an LLC
- The McNulty opinion significantly limits one’s ability to hold retirement account-owned Bitcoin on a cold wallet.
- Federal policy moved in crypto's favor in 2025 and 2026: the Department of Labor dropped its cautionary stance on crypto in retirement plans, and a new executive order is pushing regulators to expand access further
Bitcoin has no corresponding physical element, like coins or paper bills (despite the popular image of an actual coin, above, to illustrate it). The value and verification of individual Bitcoins are provided by a global peer-to-peer network.
Bitcoin's current goal is a store of value as well as a payment system, there is nothing to say that Bitcoin could not be used in such a way in the future.
Bitcoin is often compared to gold since it shares some crucial characteristics such as the limited supply and supply growth through mining and the non-centrality and independence of central banks.
Gold:
- Durable/Divisible/Scarce
- 1/2% growth a year in historical supply
- Hard to transplant
- Functionality – can turn in jewelry
Bitcoin:
- Supply limited by design of its protocol
- Borderless/Decentralized
- Only 21 million - predictable issuance rate
- Far more portable
- volatile
Bitcoin Blockchain
One of the most exciting aspects of Bitcoin is the concept of blockchain. A Bitcoin holds a very simple data ledger file called a blockchain. A Block refers to a set of Bitcoin transactions from a certain time period. Blocks are “stacked” on top of each other in such a way that one block depends on the previous. In this manner, a chain of blocks is created, and thus we come to the term “blockchain”. Below is an example of how the Bitcoin blockchain works.
- After one sends Bitcoin using a Bitcoin wallet, this transaction information is relayed throughout the network — passes from node to node (from a server to server) until it is transmitted to all the nodes.
- The miners (computers) then pick up this transaction information from nodes and perform a special process called mining on it, typically by using special processors called Application Specific Integrated Circuits (ASICs).
- The transaction information is then converted into a unique 32-character length string called hash.
- After hashing a transaction, miners then link it with the immediately preceding hash and thus create a chain of transactions after mining a few and linking them together. This chain of mined transactions is called a block.
- The block is then linked to the previous block using the previous block hash found on the Blockchain.
Bitcoin Key Terms
- Private Key: Secret number that allows bitcoins to be spent. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. The private keys are mathematically related to all Bitcoin addresses generated for the wallet.
- Public Key: The public key is used to verify the digital signature, which proves ownership of the private key.
- Blockchain: Decentralized record-keeping technology behind the Bitcoin network.
- Mining: Miners receive Bitcoin as incentive that motivates people to assist in the primary purpose to legitimize and monitor Bitcoin transactions, ensuring their validity.
- Nodes: Node stores and verifies each block in the blockchain. Nodes form a network by connecting and sharing blocks and transactions with one another.
- Hash: This is the value obtained by passing the previous hash value, the data and the nonce through the SHA-256 algorithm; it is the digital signature of the block. SHA-256 is a cryptographic hash algorithm that produces a unique 256-bit alphanumeric hash value for any given input, and that is the unique feature of this cryptographic algorithm: Whatever input you give, it will always produce a 256-bit hash.
Below we will review how you can invest in Bitcoin (and other cryptos) with your Self-Directed IRA. Please note, however, we are not telling you to invest in Bitcoin. This article is for educational information about Bitcoin investing with IRA funds. Investing in Cryptocurrencies is a very risky investment. Be sure to consult with a financial advisor to determine the best investments for your situation.
Buying Bitcoin in a Self-Directed IRA in 2026
Retirement accounts are allowed to invest in just about anything. The IRS simply tells you what you cannot invest in. These include life insurance, most collectibles, and transactions involving disqualified persons (more on this later).
In IRS Notice 2014-21, the IRS issued guidance on the tax treatment of cryptos. In the Notice, the IRS confirmed that cryptos, such as Bitcoin would be treated from a tax perspective as a capital asset, such as property, like a stock or real estate. Thus, since an IRA and 401(k) plan can purpose property, such as stocks, cryptos are also permitted investments for retirement accounts. The sale of a cryptocurrency is not subject to tax and all gains are tax-deferred or tax-free in the case of a Roth IRA or Roth 401(k). This is still the governing IRS position on crypto taxation today; the agency hasn't issued IRA-specific crypto guidance since.
What Type of Retirement Accounts can be used to Buy Cryptocurrency with IRA Financial Crypto Solution?
Tax Advantage of Buying Cryptos in a Self-Directed IRA
One of the main tax advantages of using a Self-Directed IRA to invest in cryptos, such as Bitcoin is that, in general, all income and gains are tax-deferred or tax-free in the case of a Roth IRA. In other words, an IRA would not be subject to ordinary income tax or any capital gains tax on income or crypto gains allocated to an IRA, irrespective of holding period. For active crypto traders, using a self-directed is a huge tax advantage. Most active Bitcoin traders will not hold the underlying asset for longer than twelve months, meaning the gains from the capital investment would be subject to short-term capital gains, which is taxed based on the taxpayer’s ordinary income tax rate. Whereas, if the investor used a self-directed IRA to invest in Bitcoin, no tax would be due on any of the trading gains allowing the investor to take advantage of the power of tax deferral and compounding returns.
Read More: Crypto IRA Fees
Where Crypto Retirement Rules Stand in 2026
The rules for holding crypto inside a Self-Directed IRA haven't changed since Notice 2014-21, but the policy climate around crypto in retirement accounts generally has shifted quite a bit since this article first published.
In May 2025, the Department of Labor withdrew its 2022 guidance that had discouraged 401(k) fiduciaries from offering crypto as a plan investment (Compliance Assistance Release 2025-01). The DOL now describes itself as neutral, "neither endorsing nor disapproving" of a fiduciary's decision to include crypto in a plan's menu.
A few months later, in August 2025, the White House issued an executive order, "Democratizing Access to Alternative Assets for 401(k) Investors," directing the DOL and SEC to reexamine rules that make it harder for 401(k) plans to offer crypto, private equity, and other alternative assets. In March 2026, the DOL followed up with a proposed safe harbor rule that would judge a fiduciary's decision to include alternative assets by the process they followed rather than the outcome. That rule is still a proposal, not final, as of this writing.
None of this affects what you can already do in a Self-Directed IRA, where crypto has been a permitted asset since 2014. What it does mean is that the regulatory friction that made some 401(k) providers reluctant to touch crypto is easing, and it's worth watching if you're weighing a rollover into a Self-Directed IRA versus staying in an employer plan. For more on how this could reshape 401(k) investing generally, see Alternative Assets in 401(k) Plans: What the DOL's 2026 Proposed Rule Actually Changes.
Best Ways to Buy Bitcoin in a Self-Directed IRA
Bitcoin in an IRA LLC
Most crypto exchanges do not offer one the ability to open an IRA at a crypto exchange. The only legal way to purchase cryptocurrencies, such as Bitcoin, is through a regulated crypto exchange. Using an LLC wholly owned by an IRA has become a popular approach to investing in Bitcoin with retirement funds. Opening a crypto IRA using an LLC will allow the IRA owner to essentially select any cryptocurrency exchange in the U.S. as well as internationally. In addition, using a Bitcoin IRA LLC solution will offer the IRA owner the ability to hold the Bitcoin private key on a cold wallet (see below for info on the McNulty case). Considering the FTX bankruptcy, holding one’s Bitcoin private key has become almost a requirement from a security standpoint. This is especially important when one owns Bitcoin in a retirement account. Moreover, using a Bitcoin IRA LLC solution would allow one to open a crypto exchange account at a foreign exchange and purchase XRP and other cryptos that may not be available in the United States. Although, one should be cautious about holding cryptos on a foreign exchange, especially considering FTX.
Below is a breakdown of how it works
- The individual opens an IRA at IRA Financial, a regulated Self-Directed IRA trust company
- IRA would own 100% of the LLC and IRA owner would serve as manager of the LLC
- You, as manager of the LLC, would open an account with a crypto exchange
- IRA owner would open the LLC account at the crypto exchange (i.e. Coinbase or Binance)
- LLC’s bank account would be linked to the crypto exchange account
- IRA owner would have total control over the account and can hold cryptos on the exchange or pull cryptos off the exchange and hold in a cold wallet.
The Bitcoin IRA LLC is the only Self-Directed IRA crypto solution that will offer a retirement account owner with the ability to hold their crypto private key as well as use a US or foreign crypto exchange of their choice. For more information on the rules surrounding the ability to hold your retirement account owned Bitcoin on a cold wallet, please see below.
IRAfi Crypto™
We are very proud to have the industry’s premier solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first Self-Directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC. Investors can use their retirement funds to buy nearly 100 cryptocurrencies directly through Bitstamp, now a Robinhood company following Robinhood's June 2025 acquisition of the exchange. Bitstamp was founded in 2011, holds licenses across the US, UK, EU, and Asia, and continues to operate under its own name and regulatory registrations, including as a New York-regulated money transmitter.
IRAfi Crypto™ is the first structure to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange. The account is opened in the name of the IRA but controlled by you as the authorized representative on the account. The IRA holder has 100% control over the account and can trade anytime. The platform was rebuilt in 2026 with real-time trading, portfolio performance graphs, and a mobile-friendly interface.
How Does the IRAfi-Bitstamp Crypto Solution Work?
Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.
Step 2: Move IRA or 401(k) funds to new IRA Financial account tax-free.
Step 3: Funds are moved From IRA Financial to Bitstamp
Step 4: Begin buying and selling cryptos 24/7 on your own without the need for any broker or the use of an LLC on the IRA Financial app.
With the Bitcoin IRA direct solution, you can invest in cryptos directly. In other words, you do not need a costly broker or LLC. In addition, the Bitcoin will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.
Advantages
- No requirement to use broker
- No requirement to use LLC
- Ability to buy, sell, or exchange cryptocurrencies at any time through a PC or mobile application
- Flat low annual IRA custodian fee – no asset valuation fees
Disadvantages
- You can only purchase the most popular cryptocurrencies.
- The cryptos must be held on the Bitstamp exchange
Holding Your Bitcoin Private Key in a Self-Directed IRA
The only provision in the Internal Revenue Code (“IRC”) that addresses the ability to personally possess, and IRA asset is IRC 408(m). IRC 408(m) prohibits an IRA owner from taking personal possession of an IRS approved precious metal or coin. The tax court in In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021) expanded on the concept of personal possession of an IRA asset by holding that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. So how does the tax court ruling in McNulty impact the ability of a retirement account investor to hold Bitcoin on a cold wallet? The short answer – is that the court opinion would seem to potentially prohibit one from holding their retirement account owned Bitcoin on a cold wallet. As of 2026, McNulty remains the controlling precedent on this question; no case since has addressed digital assets directly.
A Bitcoin cold wallet is a device that allows Bitcoin to be held offline. By using a cold wallet, Bitcoin investors can securely hold their Bitcoin off an exchange prevent hackers from being able to access their holdings via traditional means. Considering the FTX bankruptcy and the potential for crypto exchange contagion, holding one’s Bitcoin on a cold wallet has become more important. Considering McNulty, which would seem to make holding Bitcoin owned by a retirement account in a cold wallet controlled by the retirement account owner, what are some arguments that can be made to minimize the impact of McNulty on holding retirement account owned Bitcoin on a cold wallet?
- Cryptocurrency, such as Bitcoin is a new type of digital asset that is based off blockchain technology. It is a unique asset because even though it is an intangible asset, it can still be held physically in a cold wallet. Thus, applying the traditional rules of McNulty to a digital asset would be inappropriate
- Blockchains are entirely open and accessible to everyone. Thanks to the transparency of the blockchain, it is easy to track the movement of Bitcoin. If the identity behind a Bitcoin wallet address is known, then the transactions made can be traced back and traced in the future. All these transactions can be viewed in detail. Therefore, a retirement account owner would be able to provide to the IRS or any third-party that the crypto held in the cold wallet was not used for any personal purpose by simply providing the IRS with the Bitcoin wallet number
- For retirement account investors seeking to use an LLC to invest in Bitcoin, moving the Bitcoin off the exchange to a cold wallet that is held at a depository, like metals could be a solution. The advantage of this option is that you would be able to get the cryptos off the exchange and held secure in a depository that specializes in safe keeping of valuable assets, such as gold. The downside is that you do not retain total control over the wallet, although, considering the McNulty case, retaining total control is likely not a viable option.
- The bankruptcy of FTX crypto exchange in November 2022 has created a sense of urgency amongst Bitcoin investors seeking to protect their Bitcoin from crypto exchange risk. Bitcoin held on an exchange are controlled by the exchange and since the exchange controls the Bitcoin private key, a crypto exchange bankruptcy will put Bitcoin on the exchange at risk. For retirement account investors shielding their Bitcoin from exchange risks is even more vital since for many Americans, their retirement account is their primary source of savings.
Choosing the Right Structure for You in 2026
For self-employed investors, the Solo 401(k) cold wallet solution described above currently offers the most direct path to personal custody, since a plan trustee's duty to hold assets "in trust" is treated differently than an IRA custodian's duty under McNulty. For IRA owners specifically, the Bitcoin IRA LLC remains the structure that offers the most control over private keys, while IRAfi Crypto™ trades some of that control for simplicity and lower overhead. A multi-signature wallet, requiring both the account owner's and the custodian's sign-off to move funds, remains one of the approaches the industry continues to explore as a way to give IRA owners more control while still satisfying McNulty's custody requirement.
401(k) In-House Tax Filing, IRS Reporting, and BOI Reporting
IRA Financial is the only Self-Directed Solo 401(k) provider that offers its 401(k) clients an in-house tax filing, IRS tax reporting, and annual tax consulting service. Starting in 2024, the annual service will also handle BOI reporting requirements under the Corporate Transparency Act (CTA) with FinCEN.
IRA Financial has designed a specialized Solo 401(k) tax annual tax filing and compliance service, which will now offer our clients the necessary IRS filing services to keep your plan in IRS compliance. Now – as part of annual consulting service, IRA Financial will prepare and file Form 1065 (U.S. Return of Partnership Income), Form 990-T (UBIT income tax return), IRS Form 5500-EZ, IRS Form 1099-R, and the BOI Report with FinCEN.
The following are the IRS tax forms that IRA Financial will now help file for your Self-Directed Solo 401(k) plan.
IRS Form 1065 - U.S. Return of Partnership Income
With a Self-Directed Solo 401(k) plan with checkbook control, a special purpose LLC is established that would be owned by the 401(k) and managed by the 401(k) trustee (you). As manager of your Solo 401(k) LLC, you have the authority to make IRS-approved alternative asset investments on behalf of your 401(k) on your own, in privacy, and with limited liability protection. With a Solo 401(k) with Checkbook Control, you will be able to make investments, such as real estate, by simply writing a check. Since all your 401(k) funds will be held at a local bank in the name of the 401(k) LLC, all you would need to do to make the investment is write a check straight from the 401(k) LLC bank account or simply wire the funds.
In the case of a Self-Directed Solo 401(k), a single-member IRA LLC is not required to file a partnership return (IRS Form 1065) as it is treated as a disregarded entity for federal income tax purposes. However, an LLC owned by two or more retirement accounts is treated as a partnership for federal income tax purposes, and, in general, a partnership return (IRS Form 1065) must be filed BY MARCH 15, 2024 for the 2023 taxable year.
IRS Form 990-T - UBIT income tax return
Form 990-T is the tax form where a charitable organization or retirement account, such as a Solo 401(k), reports income that would be subject to the unrelated business taxable income tax (UBTI or UBIT). In general, a Solo 401(k) plan will trigger the UBTI tax in the following circumstances:
- Use of a nonrecourse loan to acquire an asset, such as stock
- Investment in an active business operated through a pass-through entity, such as an LLC
For Solo 401(k) investors who will have unrelated business taxable income or unrelated debt-financed income (UDFI) in excess of $1,000 after taking into account allowable deductions and expenses, such as depreciation, debt servicing, etc., the IRA would be required to file IRS Form 990-T, and Schedule A by April 15, 2024, for the 2023 taxable year. Filers may request an automatic extension of time to file Form 990-T by using Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return.
The return must be filed by the 401(k) plan and not by the individual or plan trustee. In addition, the retirement account should acquire its own tax Identification number if it does not already have one.
IRS Form 5500-EZ
The IRS Form 5500-EZ is an annual information return that is required to be filed by every “One-Participant Plan” (owners and their spouses) with plan asset value in excess of $250,000 as of December 31 of the previous tax year. The purpose of filing and reporting the fair market value (“FMV”) of your plan’s assets is to inform the IRS of assets over $250,000 annually held in a Solo 401(k) plan. The Form 5500-EZ is due every July 31st of the next plan year. Ex: for a plan that was established in 2023, the IRS Form 5500-EZ is due by July 31st, 2024.
IRS Form 1099-R
IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., must be filed for each Solo 401(k) plan participant that either made a distribution, Roth conversion, or 401(k) rollover. For the 2023 tax year, February 15, 2024 is the due date to distribute recipient copies. February 28, 2024 is the due date if you choose to file by paper, and March 31, 2024 is the deadline for Form 1099-R electronic filing.
BOI Report
Beginning on January 1, 2024, a significant number of companies in the United States will have to report information about their beneficial owners (the individuals who ultimately own or control the company). The beneficial owners will have to report the information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.
All entities formed or registered to do business in the United States will need to either (i) confirm they qualify for an exemption from the CTA’s reporting requirements or (ii) timely submit a BOI report to FinCEN.
A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:
- full name.
- date of birth.
- complete current residential street address.
- ID number and jurisdiction of issuance for one of the following:
- US passport
- state, local, or Indian tribal identification document, or
- state-issued driver’s license; and
- an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.
Does my Solo 401(k) Need to File a BOI?
A full-service Solo 401(k) is exempt from filing a BOI report. The BOI requirements under FinCEN will only apply if your Solo 401(k) owns an entity, such as an LLC (“checkbook control”), and you, as the 401(k) trustee, manages the entity.
Does my Solo 401(k) LLC Need to File a BOI?
Under the CTA rules, a Solo 401(k) LLC would be deemed a reporting company and would, thus, be required to file a BOI report with FinCEN. A “Checkbook Control 401(k)” is an investment structure where a 401(k) plan owns an LLC and is managed by the plan trustee. Since the BOI report must be completed by an individual and a 401(k) is not an individual, but a retirement account, the report would need to include the information for the 401(k) owner, who is the person in control of the LLC as the manager.
Solo 401(k) LLC Established Prior to January 1, 2024
If you have a Solo 401(k) LLC that was established prior to January 1, 2024, you will until December 31, 2024 to complete the BOI report with FinCEN.
Solo 401(k) LLC Established After January 1, 2024
If you establish a Solo 401(k) LLC on January 1, 2024 or later, a BOI report will be required to be filed with FinCEN within 90 days of formation.
Will IRA Financial will File the BOI Report with FinCEN for My Solo 401(k) LLC?
In order to relieve our clients of the stress and responsibility of acquiring a FinCEN number and filing a BOI report for their Solo 401(k) LLC, we will be offering this service to all our clients that have elected to join our annual consulting/compliance program. Note – we can only file the BOI report if ALL members of the entity are retirement accounts administered by IRA Financial.
Conclusion
IRA Financial has helped over 24,000 clients with over $3.2 billion in assets take control of their future by investing in alternative assets with a self-directed retirement plan. We are proud to be the only self-directed retirement company that offers an in-house tax filing, IRS reporting, and annual tax consulting service for its Self-Directed Solo 401(k) clients. IRA Financial is the only self-directed retirement company that will handle all your Solo 401(k) setup, administration, and IRS tax filing/reporting needs.
IRA In-House Tax Filing, IRS Reporting, and BOI Reporting
IRA Financial is the only Self-Directed IRA provider that offers its clients an in-house tax filing, IRS tax reporting, and annual tax consulting services. Starting in 2024, the annual service will also handle BOI reporting requirements under the Corporate Transparency Act (CTA) with FinCEN.
IRA Financial has designed a specialized Self-Directed IRA tax annual tax filing and compliance service, which will now offer our clients the necessary IRS filing services to keep the Self-Directed IRA retirement solution in IRS compliance. Now – as part of annual consulting service, IRA Financial will prepare and file Form 990-T (UBIT income tax return), and the BOI Report with FinCEN.
The following are the IRS tax forms that IRA Financial will now help file for your Self-Directed IRA.
IRS Form 1065 - U.S. Return of Partnership Income
With a Self-Directed IRA with checkbook control, a special purpose LLC is established that would be owned by the IRA and managed by the IRA holder (you). As manager of your Self-Directed IRA LLC, you have the authority to make IRS-approved alternative asset investments on behalf of your IRA on your own, in privacy, and with limited liability protection. With a Self-Directed IRA LLC with Checkbook Control, you will be able to make investments, such as real estate, by simply writing a check. Since all your IRA funds will be held at a local bank in the name of the IRA LLC, all you would need to do to make the IRA investment is write a check straight from the IRA LLC bank account or simply wire the funds.
In the case of a Self-Directed IRA, a single-member IRA LLC is not required to file a partnership return (IRS Form 1065) as it is treated as a disregarded entity for federal income tax purposes. However, an LLC owned by two or more IRAs is treated as a partnership for federal income tax purposes, and, in general, a partnership return (IRS Form 1065) must be filed BY MARCH 15, 2024 for the 2023 taxable year.
IRS Form 990-T - UBTI Income Tax Return
Form 990-T is the tax form where a charitable organization or retirement account, such as an IRA, reports income that would be subject to the unrelated business taxable income tax (UBTI or UBIT). In general, a Self-Directed IRA plan will trigger the UBTI tax in the following circumstances:
- Use of a nonrecourse loan to acquire an asset, such as stock
- Use of a nonrecourse loan to acquire real estate. Note – there is an exception for a Solo 401(k) plan
- Investment in an active business operated through a pass-through entity, such as an LLC
For Self-Directed IRA investors who will have unrelated business taxable income or unrelated debt-financed income (UDFI) in excess of $1,000 after taking into account allowable deductions and expenses, such as depreciation, debt servicing, etc., the IRA would be required to file IRS Form 990-T, and Schedule A by April 15, 2024, for the 2023 taxable year. Filers may request an automatic extension of time to file Form 990-T by using Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return.
The return must be filed by the IRA and not by the individual or plan trustee. In addition, the retirement account should acquire its own tax Identification number if it does not already have one.
BOI Report
Beginning on January 1, 2024, a significant number of companies in the United States will have to report information about their beneficial owners (the individuals who ultimately own or control the company). The beneficial owners will have to report the information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.
All entities formed or registered to do business in the United States will need to either (i) confirm they qualify for an exemption from the CTA’s reporting requirements or (ii) timely submit a BOI report to FinCEN.
A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:
- full name.
- date of birth.
- complete current residential street address.
- ID number and jurisdiction of issuance for one of the following:
- US passport
- state, local, or Indian tribal identification document, or
- state-issued driver’s license; and
- an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.
Does my Self-Directed IRA Need to File a BOI?
A full-service Self-Directed IRA is exempt from filing a BOI report. The BOI requirements under FinCEN will only apply if your Self-Directed IRA owns an entity, such as an LLC (“checkbook control”), and you, as the IRA owner manages the entity.
Does my Self-Directed IRA LLC Need to File a BOI?
Under the CTA rules, a Self-Directed IRA LLC would be deemed a reporting company and would, thus, be required to file a BOI report with FinCEN. A "Checkbook Control IRA" is an investment structure where an IRA owns an LLC and is managed by the IRA owner. Since the BOI report must be completed by an individual and an IRA is not an individual, but a retirement account, the report would need to include the information for the IRA owner, who is the person in control of the LLC as the manager.
Self-Directed IRA LLC Established Prior to January 1, 2024
If you have a Self-Directed IRA LLC that was established prior to January 1, 2024, you will until December 31, 2024 to complete the BOI report with FinCEN.
Self-Directed IRA LLC Established After January 1, 2024
If you establish a Self-Directed IRA LLC on January 1, 2024 or later, a BOI report will be required to be filed with FinCEN within 90 days of formation.
Will IRA Financial will File the BOI Report with FinCEN for My Self-Directed IRA LLC?
In order to relieve our clients of the stress and responsibility of acquiring a FinCEN number and filing a BOI report for their Self-Directed IRA LLC, we will be offering this service to all our clients that have elected to join our annual consulting/compliance program. Note – we can only file the BOI report if ALL members of the entity are retirement accounts administered by IRA Financial.
Conclusion
IRA Financial has helped over 24,000 clients with over $3.2 billion in assets take control of their future by investing in alternative assets with a self-directed retirement plan. We are proud to be the only self-directed retirement company that offers an in-house tax filing, IRS reporting, and annual tax consulting service for its Self-Directed IRA clients. IRA Financial is the only self-directed retirement company that will handle all your Self-Directed IRA setup, administration, and IRS tax filing/reporting needs.
Have a Side Hustle? Establish A Solo 401k
- Your side hustle can do more than provide additional income.
- If you have a side hustle, you become eligible to establish the Solo 401k.
- A Solo 401k is a robust retirement plan and the most popular among the self-employed.
In 2024 more people than ever will be looking for a side hustle that can provide additional income. Whether it’s blogging, driving for DoorDash, reviewing products on YouTube, or hosting for Airbnb, the options are really endless.
Working for oneself has a number of benefits, including the opportunity to establish a Solo 401k. With the Solo 401k, monies earned outside of working for someone else, i.e. income from your side hustles, can be invested as desired within the limits of the law. A Solo 401k allows investors to make personalized decisions on what to invest in.
Types of Side Hustles
Getting a side hustle to profit can be quick and easy, with a little forethought and planning. Driving for a car service like Lyft or Uber during bad weather may mean additional opportunities to earn money. In the same way people are always looking for a taxi in bad weather, they may also be looking for a driver during events – New Year’s Eve or Saint Patrick’s Day can be good opportunities to earn some extra money that can be invested in the future with a Solo 401k.
Delivering food for Door Dash and Uber Eats is also an opportunity to earn some additional cash. During big games and live events, or whenever people don’t want to leave where they are, food delivery services can have a booming business.
Become an Airbnb Host
Making big money from a side hustle can often be achieved by being an Airbnb host. You may know that you can invest in an Airbnb with a Solo 401k, but you can also become an Airbnb host to satisfy one of the two Solo 401k requirements: generating self-employment income.
When it comes to this side hustle, consider the physical location of the home you’re offering. Is it near a college football stadium? Near a professional baseball park? Close to an area where celebrations take place, like Times Square in New York City?
The location of the real estate makes the biggest difference here, but thinking outside the box can help, too. Maybe the home is a large one, with recreational facilities nearby. That could make it a perfect place for family reunions in the summer, or ski vacations in the winter. Even if a location is not right next door to an attraction, it may be close enough for vacationing families who are looking to spend less than on a theme park hotel, and are willing to drive to a site.
Earning $5.00 a day from a side hustle x 365 days per year, equals $1,825 extra dollars per year. An extra $10.00 per day yields $3,650 in one year. This can mean some serious money from something not even being done full-time, and hardly being done part time, depending on the job being done. As with all decisions, it is important to consider any initial investment of funds required, time spent doing a job vs. return on time, and any risks that may be inherent in a job.
Explore Outside the Box
Explore outside the box of your typical side hustle and take on more creative ventures. Airbnb and Uber are not the only opportunities available - and unfortunately, Uber may not be an option at all, depending on where you live. Think creatively when looking for a side hustle. For example, in snow there’s the chance to shovel and earn some money that way. Bicycle courier, greeting card arranger, mover… there are lots of ways to increase income. Renting out a car is a new opportunity that wasn’t available even a few years ago. Traditional options include dog walking and babysitting.
And the side hustle money collected can go right into a Solo 401k, to be directed to the investment of choice. Solo 401ks can be used to invest in every option traditional 401ks have, as well as additional areas of interest traditional 401ks usually will not venture into. Solo 401k investors have used their funds for cryptocurrency, real estate, and traditional value investments.
Convertible Note Investments & Your Self-Directed IRA
Investing in convertible notes has become a popular note-structuring transaction. As a result of the banking crisis and the reluctance of many banks to lend funds to small businesses, a growing number of small businesses and start-ups are looking to convertible notes as a way to finance their business or start-ups.
This article will explore the use of convertible notes by Self-Directed IRA investors and some of the tax matters to consider when electing to use them with retirement funds.
- A convertible note allows a loan to be converted into equity instead of being paid back with interest
- A Self-Directed IRA can act as the lender to a business (the borrower)
- You must be aware of the tax implications of the equity, depending on the type of business entity involved
What is a Convertible Note?
A convertible note is a hybrid between a loan and equity investment where the loan can be converted into equity rather than being paid back solely in interest. Convertible notes are popular among start-up businesses that have trouble borrowing money from banks. At the same time, a convertible note or bond can also be used by mature businesses, such as publicly traded corporations. They are private instruments that can vary based on the terms agreed upon by the lender and borrower. However, it is common that when structuring a convertible note for a start-up, the note will convert based on a triggering event, which can be the startup’s next round of financing that exceeds an agreed-upon minimum threshold, a period, or on a specific business achievement.
In sum, a convertible note is originally structured as a debt investment but contains an option that allows the principle, plus accrued interest, to convert into an equity investment at a later date. This provides the lender with the potential economic upside of an equity investment, which is especially exciting for start-ups.
Below is a breakdown of the steps involved in making a convertible note investment:
Step 1: The convertible note holder (the Self-Directed IRA for our purposes) lends capital to a startup (the borrower). The terms of the convertible note is outlined in a convertible note agreement and promissory note.
Step 2: As part of the convertible note investment, the Self-Directed IRA lender earns interest while the loan is still outstanding, which is typically a short period (12-24 month is common). However, because the borrower is typically a start-up, the interest is usually paid in the form of an accrual; for example, the interest is added to the principle rather than paid in cash as interest.
Step 3: With a traditional loan, the borrower is contractually obligated to repay the principle on the maturity date. But in the case of a convertible note, the hybrid instrument will convert into equity, contingent on the terms of the note.
Equity vs. Debt vs. Convertible Notes
Below is a table that characterizes the differences between equity and debt, which is helpful in understanding the characteristics of being a lender versus an equity owner:
| Equity | Debt | |
| Ownership | Yes | No |
| Voting Rights | Yes | No |
| Repayment of Investment | No guaranty of repayment until sale of company. | Repayment on fixed schedule. |
| Payment of Dividends or Interest | In the case of a corporation, dividends may be paid | No dividends. Interest paid on fixed schedule. |
| Payment on Sale of Company | Entitled to sale proceeds based on ownership percentage, subject to debt and other payments made first. | Paid prior to equity, and receives remaining capital plus any unpaid interest. Benefit limited to invested capital plus interest. |
How to Invest in a Convertible Note with a Self-Directed IRA
In order to invest in a convertible note in a private company using an IRA or rollover 401(k) plan, one will need to use a Self-Directed IRA, which is a plan that allows for alternative asset investments. Banks and traditional financial institutions do not generally offer alternative investments to their clients, which is why you need to self-direct your plan with a regulated trust company, such as IRA Financial.
The following are the steps required to use an IRA Financial SDIRA to invest in a convertible note investment:
- Setup an account at IRA Financial through our app
- Move funds from another retirement account to your new Self-Directed IRA tax free
- Provide IRA Financial with the convertible note documentation necessary to facilitate the note investment
- IRA Financial will send the money to borrower/corporation.
- The lender would be titled in the name of the IRA for the benefit of the IRA owner or in the name of an LLC, in the case of a Self-Directed IRA LLC. All interest would flow to the IRA tax-free, or in the case of a conversion, the equity would be titled in the name of the IRA.
Taxation of Self-Directed IRA Convertible Note Investments
Taxation of Debt
A convertible note starts out as a debt instrument. Therefore, from a taxation standpoint, a convertible note that is owned by a Self-Directed IRA is taxed as a loan. The interest and principle from a loan would return to the IRA without tax. Using an IRA to make a loan is very tax advantageous since interest on a loan is taxed as ordinary income – not capital gains – which could potentially save the IRA owner up to 37% in income tax.
Taxation of Equity Interests
Once the convertible note converts from debt to equity, the taxation of the equity interests is taxed based on the type of equity. In the case of a corporation, dividends would return to the IRA without tax. Whereas if the convertible note converted from debt to an equity interest in an LLC or other pass-through entity, profits allocated to the IRA over $1,000 could be subject to the UBTI tax. A pass-through business is a business, such as a store, that is operated via an LLC or other flow through entity. Whereas if a business is owned via a corporation, the UBTI tax would not apply since a C corporation is not a flow through entity as it has a corporate level tax.
In other words, the sale of the C corporation stock and all corporate dividends allocated to the IRA would not be subject to tax. The UBIT tax imposes a maximum 37% tax on pass-through income allocated to an IRA above $15,000 or so. However, the sale of the LLC interests would be tax-free and not subject to UBTI, assuming the company did not have any outstanding leverage.
Hence, it is important to consider the tax implications if you are considering investing in a convertible note from a pass-through entity Note – a Self-Directed IRA may not invest in an S Corporation as an IRA is not an eligible S corporation shareholder based on the rules under the Internal Revenue Code.
Conclusion
Investing in convertible notes have become a popular way for investors to invest in start-ups and growth businesses. The hybrid nature of the convertible note gives the Self-Directed IRA the potential upside of an equity investor based on a contingent event. The tax advantages to lend money as well as own equity on a capital event makes the convertible note investment option very attractive for IRA investors.
Direct Register GameStop (GME) Stock Using an IRA
For retirement investors of GameStop (GME) and other meme-type stocks looking to learn how they can direct register their shares, you will want to read this article. This article will explain the concept of direct stock registration, its benefits, and the impact it can have on the future price of GME and other types of stocks.
- GameStop was big news in 2021 thanks to Reddit investors
- Direct registering your stocks can save you from a short sale
- Using a Self-Directed IRA LLC to direct register your stocks also comes with tax advantages
The GME Story
With the emergence of online gaming and cloud servers, the idea of a brick-and-mortar business selling games seemed like a thing of the past for some investors. The seeming certainty of GameStop’s demise made it an clear target for short sellers.
A tug-of-war between everyday investors and hedge funds heated up and support grew for GameStop on reddit/wallstreetbets. On January 22, 2021, the stock skyrocketed more than 50%. During after-hours and pre-market trading that weekend, the GME continued to climb. On Jan. 25, it opened at $96.73. On January 26, 2021: 'GameStonk' gets celeb backing from Elon Musk. Shares soared by nearly 140% in after-hours trading. The stock opened on Jan. 27 at a whopping $354.83 a share. On January 27, 2021, major short seller hedge funds close their GME stock positions at a significant loss.
On January 28, popular trading platforms, such as Robinhood and TD Ameritrade, restricted transactions that involved the stock. Robinhood stated "the decision was made based on clearinghouse-mandated deposit requirements."
What happened was a crazy day of trading, which saw the stock rise to around $483, before settling in at $112 by the time the markets closed.
Why did GME stock go up so much?
Much of the surge in GME share price seems to be at the hands of short sellers who were covering short positions by buying back GME shares. Shorting a stock is often riskier than owning one. When you own a stock, the maximum amount you can possibly lose is whatever amount you’ve invested—if you buy $100 worth of Apple, and Apple crashes to $0, you’re out $100. But with short selling, your maximum loss is hypothetically limitless, as there’s no cap on a company’s value. If you short Apple at $100, and Apple announce they have a cure for cancer, causing Apple’s stock to hit $2,000, you would be out $1900. Yikes!
How Does Short Selling Work?
Below are four steps that best explain how short selling works.
- Borrow shares from a broker who is willing to lend them for a fee.
- Shares are then sold on the open market.
- The shares are then bought back after the stock goes down in price.
- The shares are then delivered back to the lender who keep the price difference.
In practice, short sellers are supposed to borrow shares from real investors. The interesting fact is that in many cases, the real owner of the shares is not even aware that the shares they own have been lent out by the brokerage firm used by the investor. The brokerage firm is more than happy to offer up the investors' shares to short sellers. Stock lending fees are a significant source of broker revenue
The GME Short Squeeze
Short sellers have ways to defend against a surging stock they have taken a short position in. For instance, if a company stock being shorted suddenly jumps in value, they can buy the shares back at a slightly higher price rather than risk a bigger loss. For example, if you short Apple at $100 and it climbs to $150, you may decide to eat the $50 loss rather than chance an even worse outcome.
But when a huge number of people are shorting a particular stock that suddenly skyrockets, it can trigger a “short squeeze,” where short sellers hurry to buy up more shares to give back to their lenders. That drives up demand and reduces supply, further increasing the price and thus getting even more short sellers to buy, and so on. It’s a brutal cycle that can annihilate short sellers, but benefit investors who owned the stock before the squeeze.
How Are Stocks Titled for Ownership Purposes?
Before computers, stock ownership was reflected in paper certificates which were mailed to the investor. The share certificate contained the actual name of the owner. Today, book entries are used in place of paper certificates. Initially, several institutions were tasked with handling the book entries and clearing of trades. However, over the last twenty or so years, one single private organization has taken over complete control over the handling and registration of shares. The organization is known as the DTCC (Depository Trust and Clearing Corporation).
Under the DTCC, when an investor uses a broker to buy stock, the DTCC’s subsidiary, the DTC (Cede & Co.), is the name that is entered on the “books” at a transfer agent, such as Computershare, for every single existing share. The investor is only the “beneficial owner” on your broker’s books, but the broker is the “beneficial owner” on the DTCC’s books. The DTCC is the primary owner, while the broker is the secondary owner, and the investor is a third-level owner on the share that the investor actually bought and paid for.
In essence, the only way for an average investor to be the primary owner of any shares of stock they purchase is to direct register that stock with the transfer agent for the company. Direct registration of stock puts the investor on the same level of ownership as the DTCC.
Why Direct Register a Stock?
At its core, the main reason why one would want to direct register their GME or other stock they own is to prevent an ongoing market manipulation and price suppression of that stock. This is what was believed to have occurred with GME stock. Whether it was through naked short selling or other means, the ability of short sellers to acquire GME shares to cover their short positions was highly controversial, to say the least. It was reported that GME investors called their brokers in droves requesting that their shares be barred from being lent out. Nevertheless, brokers continued offering GME stock for lending purposes.
The direct registration process allows any company that issues stock to use a third-party company to maintain a stockholder record of exactly which investors own each single share that exists. It can be compared to a digital stock certification. GameStop uses Computershare as their third-party company or “transfer agent.”
For GME and other company shares, the idea is that if more shares became direct registered, fewer shares would be available to short sellers. If short selling increases artificial share supply into the marketplace, direct registration of shares reduces real supply available for shorting.
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How to Direct Register GME Stock in Your Self-Directed IRA
Of course, one can own stock, such as GME, personally or in a retirement account, such as an IRA. The advantage of owning stock in an IRA is that all gains will go back to the IRA without tax; this is known as tax-deferral.
IRA Financial Trust is a regulated state charted trust company authorized to administer and custody retirement accounts. IRA Financial is not a brokerage firm and does not sell equities or provide investment advice. IRA Financial is solely responsible for the administration of IRA and other retirement accounts.
Below are the steps involved for direct registering your GME stock in a Self-Directed IRA:
- Open a Self-Directed IRA account with IRA Financial.
- Request an in-kind indirect rollover of the GME stock from their current custodian (brokerage firm). The brokerage firm will DRS (Direct Registration System) the shares into Computershare in the name of the individual IRA owner. The shares will go from the brokerage firm into the name of the IRA owner and then into the name of the IRA (IRA Financial Trust Company FBO John Doe IRA). IRA Financial, we will need a copy of this statement as well as a completed Deposit form, which you can complete on our app. The process will need to be completed within 60 days. Note – one can only do one indirect rollover every twelve months.
- IRA Financial will establish a limited liability company (LLC) that will ultimately be owned by your IRA. The LLC can use any available name. The ultimate title to the GME stock will be in the name of the LLC, which will be 100% owned by the IRA and managed by the IRA owner (you). This is known as a Self-Directed IRA LLC. The IRA owner will serve as the manager of the LLC giving the IRA owner complete control over the LLC. IRA Financial will simply be the custodian of the IRA and will have no authority over the GME stock as the LLC operating agreement provides that the LLC is controlled by the LLC manager (the IRA owner). Since a single member LLC is treated as a disregarded entity for tax purposes, no federal income tax return is required.
- The ownership of the GME stock will then be changed from the IRA owner’s name to the name of the LLC. This must be done within 60 days of having the GME shares titled in the name of the individual IRA owner. The GME stock will be re-titled from the name of the IRA owner to the name of the IRA and then to the name of the LLC.
- The GME shares will be directly registered in the name of the LLC. You, as manager of the LLC, will have complete control over the LLC.
IRA Financial will offer retirement investors of GME stock with a discounted flat low annual fee for establishing a Self-Directed IRA LLC for the direct registration of the GME stock.
Please contact a Self-Directed IRA expert for more information at 800-472-0646.
Crypto IRA - Do I Have Access to My Private Keys?
- Crypto IRAs are legal
- Private v Public Key is an important distinction
- IRA Financial can help you
There is a well-known saying among crypto enthusiasts – “no keys, no cheese.” The idea behind this phrase is that without having total control over your Crypto IRA private keys you don’t really have complete ownership of the cryptos. Unfortunately, when it comes to a Crypto IRA, holding your IRA private keys is not so simple.
Crypto IRA & The IRS
Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoin and other cryptocurrency are not considered a “currency.” In Notice 2014-21, the IRS offered guidance on the tax treatment of cryptocurrency. The IRS Notice was clear that virtual currency, such as cryptocurrency, should treated as property for U.S. federal tax purposes, just like stocks or real estate. Therefore, since an IRA and 401(k) plan can invest in capital assets, such as stocks and real estate, a retirement account is permitted to invest in cryptocurrency.
What is a Crypto IRA?
A Crypto IRA is a type of Self-Directed IRA that allows one to invest in cryptocurrency. There are a variety of different types of Crypto IRAs. The most common is a Crypto IRA where a crypto account is opened at a regulated exchange, such as Bitstamp, and the IRA owner has direct control over the crypto investments. The IRA is custodied by a Self-Directed IRA custodian, such as IRA Financial, while the cryptos are held for custody at Bitstamp, for example.
Below is a breakdown of the various type of crypto IRA solutions and the corresponding crypto exchange options available.
- Use of an LLC (Checkbook Control)
- Direct Crypto Investment
Crypto IRA LLC
The only legal way to purchase cryptocurrencies is through a regulated crypto exchange. However, most crypto exchanges do not offer one the ability to open an IRA. Using an LLC, wholly owned by an IRA, has become a popular way to purchase cryptos. Opening a Crypto IRA using an LLC will allow the IRA owner to essentially use any cryptocurrency exchange they wish to buy and sell cryptos, in the U.S., as well as globally.
In addition, using a Crypto IRA LLC solution will allow the IRA owner to hold the crypto private key on a cold wallet. In light of the FTX meltdown, holding one’s private key has become almost a necessity from a security standpoint. This is especially important when one owns cryptos in a retirement account. Moreover, using a Crypto IRA LLC solution would allow one to open a crypto exchange account at a foreign exchange and purchase XRP and other cryptos that may not be available in the United States. Although, one should be cautious about holding cryptos on a foreign exchange, especially considering of FTX.
Here's how it works:
- Individual opens an IRA at IRA Financial, a regulated Self-Directed IRA trust company
- The IRA would own 100% of the LLC and IRA owner would serve as manager of the LLC
- You, as manager of the LLC, would open an account with any crypto exchange
- You would open the LLC account at the crypto exchange (i.e. Coinbase or Binance)
- The LLC’s bank account would be linked to the crypto exchange account
- You would have total control over the account and can hold cryptos on the exchange or pull cryptos off the exchange and hold in a cold wallet
Crypto IRA Direct
We are very proud to have the industry’s best solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first self-directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC. Now, investors can use their retirement funds to buy all the major cryptocurrencies directly through Bitstamp, one of the leading US cryptocurrencies exchange. Bitstamp was founded in 2011 and is present in over 100 countries, with offices in the UK, Luxembourg, the USA, Singapore, and Slovenia, and caters to over 4 million customers across the globe.
The IRA Financial crypto solution is the first to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange. The account is opened in the name of the IRA but controlled by you as the authorized representative on the account. The IRA holder has 100% control over the account and can trade anytime.
How Does the IRAFI-Bitstamp Crypto Solution work?
Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust
Step 2: Move IRA or 401(k) funds to new IRA Financial account tax-free
Step 3: Funds are moved From IRA Financial to Bitstamp
Step 4: Begin buying and selling cryptos 24/7 on your own without the need for any broker or the use of an LLC on the IRA Financial app*.
With the Crypto IRA direct solution, you control the purchase and sale of Bitcoin (and other cryptocurrencies) directly. In other words, you do not need a costly broker or LLC. In addition, the cryptos will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.
Advantages
- No requirement to use broker
- No requirement to use LLC
- Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application*
- Flat low annual IRA custodian fee – no asset valuation fees
Disadvantages
- You can only purchase the most popular cryptocurrencies.
- The cryptos must be held on the Bitstamp exchange
What is a Crypto IRA Private Key?
The concept of cryptocurrency keys is to verify that a spent transaction was indeed signed by the owner of the funds and was not forged. When one owns cryptocurrencies, controlling the private key demonstrates your ownership of the associated cryptocurrency. In essence, your private key unlocks the right for the crypto owner to control the associated cryptocurrencies and, thus, have the power to spend it. Since the private key is the pathway to access to your cryptocurrencies, it should remain private. Hence, gaining control of your crypto’s private key is a common way to ensure a higher level of security for the underlying cryptocurrency.
The crypto public key is akin to a username, and identifies the wallet so that other parties know where to transfer coins during a transaction. Whereas, the private key is similar to a password, and is the wallet’s owner’s special access code which acts as a security device to help make sure others cannot access the cryptos stored within.
In light of the recent developments in the cryptocurrency industry, specifically the recent bankruptcies of FTX, Blockfi, Celcius, and Voyager, many crypto investors have looked to take control of their private key as a way to best protect their cryptos from exposure to crypto exchange risks. This is especially true for many retirement investors who want to better safeguard their hard earned retirement investments from loss. We know that the party that controls the private key of the corresponding crypto has control and ultimate ownership of that coin. Accordingly, since a centralized exchange controls the private keys of the coins purchased from that exchange, a surge of retirement crypto investors have been looking to find a solution that allows them to control the private keys of the cryptos owned in their retirement account. The Crypto IRA LLC solution is the only solution that will allow IRA or 401(k) investors to take control of the private keys associated with the cryptos owned in their retirement account.
What is a Cold Wallet?
The onus to keep your cryptocurrency secure typically falls on the Crypto IRA owner. The Crypto IRA owner must decide how to store Bitcoin and other cryptocurrency tokens in the safest, most secure way possible.
For a Crypto IRA investor, crypto wallets operate in a similar way to traditional wallet most of use to hold cash and credit cards. In the crypto universe, wallets can be thought of as a storage device for cryptocurrency tokens. A crypto wallet can be a physical or digital medium for storing your crypto public and private keys.
A cold storage wallet is essentially a storage devices like a USB drive which are used to keep the crypto public and private keys. Such devices, such as a Ledger Nano, can be kept safe in a safe or deposit box to make sure that they don’t fall into the hands of any bad actors.
Hardware cold wallets, such as the Ledger Nano, are becoming the most popular way to secure a wallet in an offline mode not connected to the internet. These are small devices which are water and virus proof and even support multi signature transactions. Many Crypto IRA investors wish to hold their IRA owned cryptos in a cold storage wallet for security purposes, however, a recent tax court case creates some complexity for Crypto IRA investors.
The McNulty Case
In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), the tax court ruled that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. The McNulty case involved a taxpayer who used a Self-Directed IRA LLC to invest in precious metals and real estate. The McNultys decided to take personal possession of the IRA-owned coins, which violated a provision in the tax code.
However, the tax court’s opinion focused on the taxpayer’s personal possession of the IRA-owned metals, which can have significant implications for Crypto IRA owners who wish to hold their cryptos in a cold wallet. The tax court did not reference cryptos in the written opinion, however, since cryptos can be held physically in a cold wallet, the court’s ruling in McNulty seemingly would prohibit a Crypto IRA owner from holding the cryptos in a cold wallet in his or her personal possession.
On the other hand, unlike metals, cryptos are not tangible and are a new type of digital asset. Cryptocurrency is intangible but when its private keys are held in a cold wallet, it can be tangibly controlled by the IRA owner. This is why applying IRC 408(m) and the principles of the McNulty case to holding cryptos on a cold wallet may not be an accurate comparison. In addition, there is a real security risk to holding cryptos on an exchange. The cryptos owned in an IRA are visible on a blockchain. In other words, when one buys cryptocurrency, the public address of the coin can be found on a blockchain. The blockchain provides accountability and transparency for investors but also to the IRS. Hence, unlike gold, which cannot be traced by the IRS if held personally, cryptos held on a cold wallet can be traced on the blockchain providing the IRS with the ability to audit and trace the movement of any crypto.
In sum, the opinion in the McNulty case seems to apply a broad requirement that an IRA owner does not gain unfettered command over any IRA assets. The McNulty case was based on the personal possession of metals and coins, which IRC 408(m) clearly states must be held in the physical possession of a U.S. trust company. Moreover, the fact that cryptocurrency is a new intangible asset class that due to its cryptography makeup has a real security necessity to take physical control over such asset via a cold wallet. Unlike metals, because blockchain technology offers full transparency to the movement of any cryptocurrency, holding cryptos in a cold wallet will still provide the IRS with the ability to audit the movement of said crypto. However, there is currently no direct IRS guidance on the ability of a retirement account holder to hold retirement account owned cryptos on a cold wallet.