How and why to hold bitcoins in your Roth IRA (yes, you can do it today!)

[jzcjca00]

Why would I want bitcoins in my IRA? Assuming I ever make a huge "profit" from them I have no intention of paying any capital gains tax on any perceived 'gain' .. I will merely spend them into goods purchased such as bullion... the base purchase price for the bullion then becomes my new "cost basis" if you will. How will they ever know? I wish I had that problem... alas I don't.

That's entirely up to you.  Be aware, however, that many people have gone to jail in the U.S. for tax evasion, and most of them also thought they would not get caught.

This scheme is for someone who wants to LEGALLY avoid paying capital gains taxes and not risk doing jail time.

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[aminorex]

The contribution limit on a SEP IRA is $51,000 or 25% of salary, whichever is lower, for 2013.

If you have a small business and employ your spouse, the two of you can contribute up to 25% of income, up to $102,000 in 2013, up until April 15.

A SEP IRA funded 100% from post-tax dollars is eligible for rollover into a Roth IRA.

There, I just saved you approximately $1,500,000,000 in tax savings which will accrue on the bitcoin in your tax-free IRA

Tips appreciated.  17zDp3jsT9fmjBShBi8HQtdhr5FJfCJ7Xd

[Bostonbitcoin]

Perhaps those who have already done it are trying to keep it a secret.  Maybe they're afraid if too many people start doing it, the IRS will change the rules and disallow it.

If there was a way to do it a major investment firm would do it and make billions of dollars in a week.

[skivrmt]

Perhaps those who have already done it are trying to keep it a secret.  Maybe they're afraid if too many people start doing it, the IRS will change the rules and disallow it.

If there was a way to do it a major investment firm would do it and make billions of dollars in a week.

Simply not true.  Major investment firms do not do this for a couple of reasons.  One is the risk of being trustee on an assets they can't "control", like a mutual fund or stock.  Two is fees.  You can charge an IRA fee for holding alternative assets but its a lot harder to convince an investor to pay an asset management fee when all Morgan Stanley, Goldman etc is doing is providing an IRA.

[Bostonbitcoin]

Simply not true.  Major investment firms do not do this for a couple of reasons.  One is the risk of being trustee on an assets they can't "control", like a mutual fund or stock.  Two is fees.  You can charge an IRA fee for holding alternative assets but its a lot harder to convince an investor to pay an asset management fee when all Morgan Stanley, Goldman etc is doing is providing an IRA.

I think people would gladly pay -- there is huge demand out there.

I looked into this for years when I was doing retail investments -- the main challenge is that the accounting is nearly impossible -- if the IRA LLC buys a small apartment building, separating the expenses of repairs, upkeep, income from rents etc. in a way that satisfies the IRS is very tough.

For Bitcoin the challenges would be great as well....suppose someone put those bitcoin in MtGox through the IRA LLC....then traded.....they could easily jury rig the trades so all profitable trades were accounted to the IRA and all unprofitable ones accounted to a regular account.....then they'd have a large loss in the taxable account and the IRA would have all the (tax deffered) gains.   The only way the IRS could be satisfied that this wasn't the case is to 1) receive an audit of the owners Mt Gox account and 2) audit the other related accounts of that person --- if there are transfers back and forth from Coinbase etc. it's even harder.

Make it more simple:  suppose Joes IRA LLC only buys and holds and that's it..... if he bought Bitcoin for $134, $300, $800 and $900 during 2013.... what is to prevent him from claiming all purchases at $134 and ignoring the $900?

Better yet.....Steve is a brilliant free state guy.....he bought $10,000 worth of Bitcoin at $10 and he has an existing IRA LLC for his real estate business.....what's to stop him TODAY when he files his taxes on claiming those were done on behalf of his IRA

Better yet, how about someone finding someone with Bitcoin they've held for a couple years and making a dummy receipt from Jan 5, 2013 payable to the person from the LLC.

The big firms always want a way to make a buck....if they could they would for sure at least offer it.

I've never ever seen it work other than for ultra wealthy.

[jzcjca00]

For Bitcoin the challenges would be great as well....suppose someone put those bitcoin in MtGox through the IRA LLC....then traded.....they could easily jury rig the trades so all profitable trades were accounted to the IRA and all unprofitable ones accounted to a regular account.....then they'd have a large loss in the taxable account and the IRA would have all the (tax deffered) gains.   The only way the IRS could be satisfied that this wasn't the case is to 1) receive an audit of the owners Mt Gox account and 2) audit the other related accounts of that person --- if there are transfers back and forth from Coinbase etc. it's even harder.

Make it more simple:  suppose Joes IRA LLC only buys and holds and that's it..... if he bought Bitcoin for $134, $300, $800 and $900 during 2013.... what is to prevent him from claiming all purchases at $134 and ignoring the $900?

Better yet.....Steve is a brilliant free state guy.....he bought $10,000 worth of Bitcoin at $10 and he has an existing IRA LLC for his real estate business.....what's to stop him TODAY when he files his taxes on claiming those were done on behalf of his IRA

Better yet, how about someone finding someone with Bitcoin they've held for a couple years and making a dummy receipt from Jan 5, 2013 payable to the person from the LLC.

The big firms always want a way to make a buck....if they could they would for sure at least offer it.

I've never ever seen it work other than for ultra wealthy.

Mixing personal and IRA LLC funds is a giant no-no, so you must have separate accounts at the exchange. 

Sure, you can lie about which trades were yours and which were the IRA LLC's, if you're not afraid of losing everything you own and spending some time in jail.  If the IRS decides to audit you, your books had better be in order.  If they decide that you mixed personal and IRA LLC funds, you might be so lucky as to have them just declare the entire IRA null and void, negating all your tax savings, plus tacking on some drastic penalties.  Or you might do some time.

So let me add this caveat.  If you feel compelled to lie on your taxes, you should probably not try to set up an IRA LLC.  You might wind up in huge trouble. 

So let's review.  This plan is no good for people who are too lazy to do the research and paperwork, and its no good for the dishonest.  And it's no good for someone who just wants to invest a few hundred dollars.

It is good for honest people who are willing to invest some time and money in order to LEGALLY avoid capital gains in the event that the bitcoin goes way up.

[Bostonbitcoin]

This is what I'm saying....not suggesting one mix assets, I'm saying that someone could and the IRS knows that which is why they are extremely strict on these things....it's a super red flag and almost certain audit which will require the owner to basically prove all of the above things didn't occur.

At the very least it would require a very good level of accounting etc.

That's all I'm saying.  I used to do a ton of work with IRAs....I've never seen this work ever, other than for the very wealthy.   I've seen lots of people try but never seen anyone do it right for a decent period of time and not have major trouble / headache.

Small businesses, closely held businesses, non public stock, real estate / income property, metals etc. there is huge demand for this from many many people.   

I guess the question to ask is if you've ever seen anyone do this successfully over a few years....you can also ask accountants and lawyers. 

[mmortal03]

This is what I'm saying....not suggesting one mix assets, I'm saying that someone could and the IRS knows that which is why they are extremely strict on these things....it's a super red flag and almost certain audit which will require the owner to basically prove all of the above things didn't occur.

Does the IRS really have it set up that way, such that if you're audited, you're guilty until proven innocent?

[Bostonbitcoin]

Does the IRS really have it set up that way, such that if you're audited, you're guilty until proven innocent?

That's the away it is with other things:  if I deduct a home office or the costs of employees, contractors, business trios etc....and they choose to audit they presume guilt until you can prove otherwise.   The more complex the thing, the more proof required.

I would rather steer clear.

I wish this would work, I really do.  I haven't done IRAs of any kind for probably 5 years or so...I used to do them all the time.  If I could confidently depend that a system like this would work I'd do it today, have a huge press release that our firm accepts Bitcoins in IRAs.....I bet we'd open 10,000 new accounts in a week

[URSAY]

Selling retirement assets and just paying the heavy taxes to buy btc sounds like the easiest route.  Easy and legal system exit.   

[jzcjca00]

Selling retirement assets and just paying the heavy taxes to buy btc sounds like the easiest route.  Easy and legal system exit.   

Yes, it would be MUCH easier to cash out the IRA and buy them in your personal accounts!  The IRA LLC is absolutely not for lazy people!

The simple and easy route

Say you had $100,000 in a Roth IRA.  Cash it in early and pay about 1/4 in taxes and penalties (depending on your tax bracket and what percentage is earnings), and buy 94 bitcoins (at $800).  Say bitcoin goes up by a factor of 10.  When you sell them, you pay $300K more in capital gains taxes, and end up with $450K.

Taking the effort to legally reduce taxes

Or you go through a large effort and expense to set up a self-directed IRA LLC, pay no taxes now, and buy 121 bitcoins.  If bitcoin goes up by a factor of 10, once you reach age 59 1/2, you can sell them for $970K and pay zero taxes.

A matter of personal choice

It's a question of how much work you're willing to do in order to reduce your taxes.  It's perfectly reasonable to take the easy route, as long as you're willing to settle for paying huge tax bills both now and later, and ending up with half as much money.

[URSAY]

Selling retirement assets and just paying the heavy taxes to buy btc sounds like the easiest route.  Easy and legal system exit.   

Yes, it would be MUCH easier to cash out the IRA and buy them in your personal accounts!  The IRA LLC is absolutely not for lazy people!

The simple and easy route

Say you had $100,000 in a Roth IRA.  Cash it in early and pay about 1/4 in taxes and penalties (depending on your tax bracket and what percentage is earnings), and buy 94 bitcoins (at $800).  Say bitcoin goes up by a factor of 10.  When you sell them, you pay $300K more in capital gains taxes, and end up with $450K.

Taking the effort to legally reduce taxes

Or you go through a large effort and expense to set up a self-directed IRA LLC, pay no taxes now, and buy 121 bitcoins.  If bitcoin goes up by a factor of 10, once you reach age 59 1/2, you can sell them for $970K and pay zero taxes.

A matter of personal choice

It's a question of how much work you're willing to do in order to reduce your taxes.  It's perfectly reasonable to take the easy route, as long as you're willing to settle for paying huge tax bills both now and later, and ending up with half as much money.

This all assumes that the user is concerned with converting back to USD instead of staying in BTC.

[jzcjca00]

Selling retirement assets and just paying the heavy taxes to buy btc sounds like the easiest route.  Easy and legal system exit.   

Yes, it would be MUCH easier to cash out the IRA and buy them in your personal accounts!  The IRA LLC is absolutely not for lazy people!

The simple and easy route

Say you had $100,000 in a Roth IRA.  Cash it in early and pay about 1/4 in taxes and penalties (depending on your tax bracket and what percentage is earnings), and buy 94 bitcoins (at $800).  Say bitcoin goes up by a factor of 10.  When you sell them, you pay $300K more in capital gains taxes, and end up with $450K.

Taking the effort to legally reduce taxes

Or you go through a large effort and expense to set up a self-directed IRA LLC, pay no taxes now, and buy 121 bitcoins.  If bitcoin goes up by a factor of 10, once you reach age 59 1/2, you can sell them for $970K and pay zero taxes.

A matter of personal choice

It's a question of how much work you're willing to do in order to reduce your taxes.  It's perfectly reasonable to take the easy route, as long as you're willing to settle for paying huge tax bills both now and later, and ending up with half as much money.

This all assumes that the user is concerned with converting back to USD instead of staying in BTC.

Not so.  For U.S. citizens, buying something with bitcoins automatically triggers capital gains taxes on the increase in value of those bitcoins since you acquired them.  Don't make the mistake of thinking that using bitcoins makes you somehow immune to Big Brother's laws.  If you don't pay the taxes your government says you owe, they will put you in jail.

I suppose I could have included an option #3, where you illegally evade the capital gains taxes, but options that include a heavy risk of jail time don't normally make my lists.

There is also an option #4, which is legal-ish, but pretty extreme.  You could move to a country with no capital gains taxes and renounce your U.S. citizenship.

The IRA LLC seems the least disruptive LEGAL way to avoid taxes on the appreciation in value of bitcoins.

[mmortal03]

So, the hope here is that the government doesn't end up defining bitcoins as collectibles as the law pertains to this in section 408(m)(1), correct?

[mmortal03]

Also, for those interested, the following seems to cover the topic of this thread in general terms: https://en.wikipedia.org/wiki/Self-directed_IRA

[jzcjca00]

So, the hope here is that the government doesn't end up defining bitcoins as collectibles as the law pertains to this in section 408(m)(1), correct?

Yes, that certainly is one risk.  The government could easily change the law to make it illegal to hold bitcoins in self-directed IRAs.  Of course, they might also change the laws to make it illegal to own bitcoins, period.  At one point it was illegal to own gold in this supposedly free country.

There is no reason to believe that the richest men in the world are going to easily give up the right to collect a fee on every single transaction that happens in the world!  The central banks and governments are definitely going to intensify their attacks against bitcoin.

However, while I do predict that there will be further government attacks on bitcoins in the U.S., my guess is that we are more likely to see attacks on mainstream use of bitcoin, as opposed to something as esoteric as ownership of bitcoin in a self-directed IRA LLC. 

I don't think the fact that they could change the laws in the future is a strong reason not to use an IRA LLC today.  Down that road lies total paralysis.

[zeetubes]

Has anyone had any experience with solo 401Ks?

[URSAY]

Not so.  For U.S. citizens, buying something with bitcoins automatically triggers capital gains taxes on the increase in value of those bitcoins since you acquired them.  Don't make the mistake of thinking that using bitcoins makes you somehow immune to Big Brother's laws.  If you don't pay the taxes your government says you owe, they will put you in jail.

I suppose I could have included an option #3, where you illegally evade the capital gains taxes, but options that include a heavy risk of jail time don't normally make my lists.

I never mentioned anything about selling my bitcoins or transacting with those purchased bitcoins.

[jzcjca00]

Not so.  For U.S. citizens, buying something with bitcoins automatically triggers capital gains taxes on the increase in value of those bitcoins since you acquired them.  Don't make the mistake of thinking that using bitcoins makes you somehow immune to Big Brother's laws.  If you don't pay the taxes your government says you owe, they will put you in jail.

I suppose I could have included an option #3, where you illegally evade the capital gains taxes, but options that include a heavy risk of jail time don't normally make my lists.

I never mentioned anything about selling my bitcoins or transacting with those purchased bitcoins.

Not many people on this forum would be interested in buying bitcoins, then never, ever selling them or using them for any purpose whatsoever.  I think most of us want to get rich, and then have the lifestyle that being rich can bring.  Eventually, that means we're going to exchange some of those bitcoins for goods and services.

So most readers of this forum should be thinking now about shielding their future gains from taxes.

[delta]

To OP,

The idea is great but the problem is with a business account on bitcoin exchange.

To avoid mixing personal funds with LLC funds, you need a LLC banking account and business account on bitcoin exchange.

Here is what Bitstamp requires to open a "corporate" account:

<<<<<   To open a corporate account with us please do so by submitting the following documents:
(i) Certificate of incorporation and Memorandum & Articles of Association or any other relevant founding documents
(ii) Annual return which details who the directors and the beneficial shareholders of your company are as of the last fiscal year or any similar documents which confirm the ownership of the company
(iii) Resolution of the Board of Directors to open an account with Bitstamp and identification of those who have authority to operate the account (if applicable)
(iv) Authorization for other persons to manage your account (if applicable)
(v) Copy of a company telephone landline bill or a recent company bank account statement addressed to your company name and office address
(vi) A high resolution image of the international passport and a proof of residency of at least two members
of the board of directors, and any owners with a ownership share of 25% or more

A proof of residency can be a scanned image of one of the following paper documents:
• bank statement (no credit card statements)
• utility bill for utilities consumed at the home address
• tax return, council tax
• certificate of residency issued by a government or a local government authority
• you can also submit other documents to serve as proof of residency such as; government-issued documents, judicial authority-issued documents, documents issued by a public agency / authority, utility service company, or similar regulated service providing companies
These documents must be provided as high resolution images and proof of residency must be scanned images of paper documents.
Finally we would ask you to please help us better understand the nature of your business by answering the following questionnaire:
1. What is the name of the company and what is its Tax / VAT ID?
2. What is the company url? How do your customers typically reach you?
3. Is your business listed on a recognized stock exchange? If so, what is your unique membership ID?
4. Who is(are) the owner(s) of your company? Please provide the information of the beneficial share ownership including the percentage of shares each beneficiary owns. Please identify all parties with beneficial voting rights for trusts.
5. What is your company's business activity? Please provide a detailed description of company activity, what service you provide, who your typical customers are, what type of payments you accept and how your services are priced.
6. Is your business regulated for AML? If so, what is your specific policy? Specifically, how do you perform KYC for your customers? Please provide as many details of your AML policy as possible.
7. What is the purpose of your trading on Bitstamp? Please describe in as much detail as possible how you intend to use your trading account. Please also help us understand how the funds which will be sent to your Bitstamp account were acquired.
8. Which bank are you using? Please provide the complete address and SWIFT code.
9. Estimated amount that you would be depositing to your Bitstamp account per month (in USD and BTC)? Please help us better understand your intended frequency and volume of deposit/withdrawal bank transfers.
10. What type of trading will be conducted? Buying/selling/both?
11. Do you have an established relationship with any other bitcoin exchange?
12. Will your company provide Bitstamp's customers services by making use of their Bitstamp accounts? If so, how?  >>>>>

Most of those requirements do not apply to LLC for IRA, so you cannot open a business account with Bitstamp. If you have an account with Bitstamp that is only for LLC but is under your personal name, the exchanges will not accept funds from LLC bank, as it is considered third party transaction.

As I understand, other exchanges have similar requirements.

How did you deal with this issue?