The IRS decision as it relates to ROTH IRA's - tax-free Bitcoin investment?

[MNDan]

I had $10,000 in ROTH IRA basis money (money I invested in a ROTH IRA acct and paid taxes on) that I pulled out penalty-free in January to invest in Bitcoin. My original thought was that I was going to treat this as a regular capital gains type investment - no tax shelter.

Now that the IRS has come out and said that Bitcoin investments are to be treated like stock market investments, it sounds like my $10,000 investment can grow and be cashed out tax-free since my withdrawal is really just a movement of my investment from one vehicle (the stock market) to another similar investment vehicle (Bitcoins).

Thoughts?

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[hello_good_sir]

I think that you would need to buy the bitcoins through an IRA account.  So you would need a broker (such as Coinbase) to offer IRA accounts.  I am not sure how IRAs work though.

If you are young you might want to think about the possibility of your IRA being seized by the government.  Private retirement accounts in Ireland, Poland, Hungary, and Cyprus have all been seized.  There is talk (just talk for now) about starting in that direction for IRAs.  Instead of outright seizure, I can imagine them cancelling the promise of tax-free withdrawals from your IRA.

[jzcjca00]

I had $10,000 in ROTH IRA basis money (money I invested in a ROTH IRA acct and paid taxes on) that I pulled out penalty-free in January to invest in Bitcoin. My original thought was that I was going to treat this as a regular capital gains type investment - no tax shelter.

Now that the IRS has come out and said that Bitcoin investments are to be treated like stock market investments, it sounds like my $10,000 investment can grow and be cashed out tax-free since my withdrawal is really just a movement of my investment from one vehicle (the stock market) to another similar investment vehicle (Bitcoins).

Thoughts?

Let me see if I understand what you're saying.  The IRS has clarified that Bitcoin IS subject to capital gains tax, so you have therefore concluded that your investment in bitcoins (which is not in a Roth IRA) is NOT subject to capital gains tax.  Sorry, no.  I do not see your logic.

The only way I know for U.S. citizens to legally shield an investment in bitcoins from capital gains tax is to hold them in a Roth IRA.  This is doable today, with some effort and expense, through an IRA LLC.  See https://bitcointalk.org/index.php?topic=396783.0.

This may become a lot easier later this year through the Winklevoss ETF or similar.  I'm predicting the price will go up in anticipation of this.  You have to weigh whether it makes sense to go to the effort and expense of setting up an IRA LLC today just to avoid the capital gains tax on that increase.  If your total investment is only $10K, my guess us that it's not worth it for you.

[MNDan]

Let me see if I understand what you're saying.  The IRS has clarified that Bitcoin IS subject to capital gains tax, so you have therefore concluded that your investment in bitcoins (which is not in a Roth IRA) is NOT subject to capital gains tax.  Sorry, no.  I do not see your logic.

The only way I know for U.S. citizens to legally shield an investment in bitcoins from capital gains tax is to hold them in a Roth IRA.  This is doable today, with some effort and expense, through an IRA LLC.  See https://bitcointalk.org/index.php?topic=396783.0.

This may become a lot easier later this year through the Winklevoss ETF or similar.  I'm predicting the price will go up in anticipation of this.  You have to weigh whether it makes sense to go to the effort and expense of setting up an IRA LLC today just to avoid the capital gains tax on that increase.  If your total investment is only $10K, my guess us that it's not worth it for you.

I don't believe you do understand what I am saying, so I will try to clarify. The IRS has said that Bitcoin investments, and their subsequent returns, are to be treated as stocks and other property are (thus their increases in value, when realized, are subject to capital gains in an ordinary situation).

However, ROTH IRA money is tax sheltered, and not subject to these capital gains. I don't know of any limitations on how ROTH IRA money can be invested - stocks & mutual funds are the usual, but currencies and real estate are also OK. Since Bitcoin now officially falls within the same category, I'm hopeful that their returns will also be categorized the same and not subject to taxes.

[jzcjca00]

Let me see if I understand what you're saying.  The IRS has clarified that Bitcoin IS subject to capital gains tax, so you have therefore concluded that your investment in bitcoins (which is not in a Roth IRA) is NOT subject to capital gains tax.  Sorry, no.  I do not see your logic.

The only way I know for U.S. citizens to legally shield an investment in bitcoins from capital gains tax is to hold them in a Roth IRA.  This is doable today, with some effort and expense, through an IRA LLC.  See https://bitcointalk.org/index.php?topic=396783.0.

This may become a lot easier later this year through the Winklevoss ETF or similar.  I'm predicting the price will go up in anticipation of this.  You have to weigh whether it makes sense to go to the effort and expense of setting up an IRA LLC today just to avoid the capital gains tax on that increase.  If your total investment is only $10K, my guess us that it's not worth it for you.

I don't believe you do understand what I am saying, so I will try to clarify. The IRS has said that Bitcoin investments, and their subsequent returns, are to be treated as stocks and other property are (thus their increases in value, when realized, are subject to capital gains in an ordinary situation).

However, ROTH IRA money is tax sheltered, and not subject to these capital gains. I don't know of any limitations on how ROTH IRA money can be invested - stocks & mutual funds are the usual, but currencies and real estate are also OK. Since Bitcoin now officially falls within the same category, I'm hopeful that their returns will also be categorized the same and not subject to taxes.

But didn't you say that you pulled the money out of the Roth IRA to invest in Bitcoin?  So if that money is no longer in a Roth IRA, it will be subject to capital gains tax.

Are you holding the bitcoins in a Roth IRA now?   If not, then they are not exempt from capital gains, right?  The Roth protection only applies to investments actually in a Roth IRA, not funds that used to be in a Roth IRA some time ago.

[MNDan]

There is no such thing as a "ROTH IRA". It's just a way to categorize money. My basis is still categorized as a ROTH IRA, regardless of where it is invested. I wouldn't mind someone with brains joining this thread.

[Keyser Soze]

There is no such thing as a "ROTH IRA". It's just a way to categorize money. My basis is still categorized as a ROTH IRA, regardless of where it is invested. I wouldn't mind someone with brains joining this thread.

If you took a distribution from your Roth IRA and paid a penalty (no penalty if it was a qualified distribution*), then the funds are no longer eligible to grow tax free. If you took a distribution and used the funds to personally buy bitcoins, they are no longer in your Roth IRA. Keep in mind that you can not custody your own Roth IRA, the assets must be held by a qualified custodian.

The only way to even consider holding bitcoins in a Roth IRA would be to either: a) find a qualified custodian willing to take custody of the bitcoins (good luck) or b) hold the bitcoins in a self directed account using a IRA LLC. Currently "a" is not possible and you should consult a professional before attempting "b".

You may want to reconsider your understanding of a Roth IRA before hurling insults.


*Qualified Distribution:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

The payment or distribution is:

Made on or after the date you reach age 59½,

Made because you are disabled (defined earlier),

Made to a beneficiary or to your estate after your death, or

One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

[BTCtrader71]

I had $10,000 in ROTH IRA basis money (money I invested in a ROTH IRA acct and paid taxes on) that I pulled out penalty-free in January to invest in Bitcoin. My original thought was that I was going to treat this as a regular capital gains type investment - no tax shelter.

Now that the IRS has come out and said that Bitcoin investments are to be treated like stock market investments, it sounds like my $10,000 investment can grow and be cashed out tax-free since my withdrawal is really just a movement of my investment from one vehicle (the stock market) to another similar investment vehicle (Bitcoins).

Thoughts?

I'm currently investigating the same question. I have cash in a Roth IRA (have not withdrawn it) and I've asked the manager of my account about bitcoin. Unfortunately, he can't help me. Basically, no one where he works knows jack shit about bitcoin beyond what I've told them. He says that I need to find an IRA custodian who will allow holding bitcoin in their IRA.

From my internet research, I think there are two options:
1) set up a self-directed Roth IRA, set up an LLC, and buy bitcoin through the LLC. I don't know enough about this to know how to do it or what pitfalls may be involved, or even if it's doable.
2) Do as advised above: find an IRA custodian who will allow holding bitcoin in their IRA.

Take a look at this excerpt from the Bitcoin Investment Trust website, http://www.bitcointrust.co/ :

INVESTING THROUGH A RETIREMENT ACCOUNT

Investing in bitcoin through a retirement account is now possible with the Bitcoin Investment Trust as several self-directed account providers now enable accredited investors to invest in the BIT through their IRAs or 401ks. Account providers include Millennium Trust Company, The Entrust Group, among others. For more information, please contact info@bitcointrust.co.

Here are the websites for the above two companies:
http://www.mtrustcompany.com/Site-Navigation/Audience-Tabs/Individuals.aspx
http://www.theentrustgroup.com/
From the websites, it looks like they both offer self-directed IRAs.

So far that's all I know. I'd be interested in hearing from anyone who has actually done this!!!

[Keyser Soze]

I'm currently investigating the same question. I have cash in a Roth IRA (have not withdrawn it) and I've asked the manager of my account about bitcoin. Unfortunately, he can't help me. Basically, no one where he works knows jack shit about bitcoin beyond what I've told them. He says that I need to find an IRA custodian who will allow holding bitcoin in their IRA.

From my internet research, I think there are two options:
1) set up a self-directed Roth IRA, set up an LLC, and buy bitcoin through the LLC. I don't know enough about this to know how to do it or what pitfalls may be involved, or even if it's doable.
2) Do as advised above: find an IRA custodian who will allow holding bitcoin in their IRA.

Take a look at this excerpt from the Bitcoin Investment Trust website, http://www.bitcointrust.co/ :

INVESTING THROUGH A RETIREMENT ACCOUNT

Investing in bitcoin through a retirement account is now possible with the Bitcoin Investment Trust as several self-directed account providers now enable accredited investors to invest in the BIT through their IRAs or 401ks. Account providers include Millennium Trust Company, The Entrust Group, among others. For more information, please contact info@bitcointrust.co.

Here are the websites for the above two companies:
http://www.mtrustcompany.com/Site-Navigation/Audience-Tabs/Individuals.aspx
http://www.theentrustgroup.com/
From the websites, it looks like they both offer self-directed IRAs.

So far that's all I know. I'd be interested in hearing from anyone who has actually done this!!!

If you are an accredited investor ($200k/year income or $1M net-worth outside of primary residence), then yes you would be able to hold shares of BIT with a retirement account. Contact the BIT if you want to go this route.

If you are not an accredited investor or do not want to use BIT, then holding bitcoins in a retirement account will be much more difficult.

You can either:
a) Set up a self directed IRA LLC to custody the asset. Seek advice from a CPA or other tax professional to set this up. There will be fees involved ($1000+) and very specific rules to follow to avoid penalties.
b) Find a custodian who will take custody of bitcoins directly. (Hint: there are none)

I am not a CPA or tax professional, please do your own research as well

[BTCtrader71]

I just came across this VERY useful article
http://coinchomp.com/2014/03/03/invest-bitcoin-within-tax-sheltered-retirement-account/

which walks through his experience with Broad Financial which offers a "bitcoin IRA":
http://www.broadfinancial.com/self-directed-ira/bitcoin-ira

[jzcjca00]

I'm currently investigating the same question. I have cash in a Roth IRA (have not withdrawn it) and I've asked the manager of my account about bitcoin. Unfortunately, he can't help me. Basically, no one where he works knows jack shit about bitcoin beyond what I've told them. He says that I need to find an IRA custodian who will allow holding bitcoin in their IRA.

From my internet research, I think there are two options:
1) set up a self-directed Roth IRA, set up an LLC, and buy bitcoin through the LLC. I don't know enough about this to know how to do it or what pitfalls may be involved, or even if it's doable.
2) Do as advised above: find an IRA custodian who will allow holding bitcoin in their IRA.

...

So far that's all I know. I'd be interested in hearing from anyone who has actually done this!!!

Back at Christmas 2013, I was where you are now.  I realized that a Roth IRA was the best place fom my bitcoins, as they can grow tax-free.  I hunted and hunted, and eventually came to realize that the IRA LLC was the only solution available to me.  (I'm not rich enough to invest in the SecondMarket BIT.)  I wrote up what I had learned here: https://bitcointalk.org/index.php?topic=396783.0.

As far as I know, this is still the only way for the average Joe to own bitcoins in an IRA.

It took about a month and cost a couple thousand dollars to set up and fund the IRA LLC.  It took me another 6 weeks to purchase the bitcoins for my IRA LLC, partly because I decided to exclusively use U.S.-based exchanges.  If anything went wrong, at least I could sue them in a U.S. Court.

CampBX turned out to be too difficult to fund, so I wound up buying them all through Coinbase.  Because of their buying limits, I had to make 50 separate purchases over a 6-week period.

In all it was probably more than 100 hours of research, filling out forms, talking to people on the phone, emailing, overnighting, waiting, roadblocks, frustration, watching prices, limit orders, and endless accounting.  But with the help of a strong stubborn streak, I succeeded.  I now have a nice little nest egg of bitcoins in an IRA LLC owned by my Roth IRA.

Now I'm just waiting for the price to go up!

It's not easy, fast, or cheap, but it's doable.

[BTCtrader71]

I'm currently investigating the same question. I have cash in a Roth IRA (have not withdrawn it) and I've asked the manager of my account about bitcoin. Unfortunately, he can't help me. Basically, no one where he works knows jack shit about bitcoin beyond what I've told them. He says that I need to find an IRA custodian who will allow holding bitcoin in their IRA.

From my internet research, I think there are two options:
1) set up a self-directed Roth IRA, set up an LLC, and buy bitcoin through the LLC. I don't know enough about this to know how to do it or what pitfalls may be involved, or even if it's doable.
2) Do as advised above: find an IRA custodian who will allow holding bitcoin in their IRA.

...

So far that's all I know. I'd be interested in hearing from anyone who has actually done this!!!

Back at Christmas 2013, I was where you are now.  I realized that a Roth IRA was the best place fom my bitcoins, as they can grow tax-free.  I hunted and hunted, and eventually came to realize that the IRA LLC was the only solution available to me.  (I'm not rich enough to invest in the SecondMarket BIT.)  I wrote up what I had learned here: https://bitcointalk.org/index.php?topic=396783.0.

As far as I know, this is still the only way for the average Joe to own bitcoins in an IRA.

It took about a month and cost a couple thousand dollars to set up and fund the IRA LLC.  It took me another 6 weeks to purchase the bitcoins for my IRA LLC, partly because I decided to exclusively use U.S.-based exchanges.  If anything went wrong, at least I could sue them in a U.S. Court.

CampBX turned out to be too difficult to fund, so I wound up buying them all through Coinbase.  Because of their buying limits, I had to make 50 separate purchases over a 6-week period.

In all it was probably more than 100 hours of research, filling out forms, talking to people on the phone, emailing, overnighting, waiting, roadblocks, frustration, watching prices, limit orders, and endless accounting.  But with the help of a strong stubborn streak, I succeeded.  I now have a nice little nest egg of bitcoins in an IRA LLC owned by my Roth IRA.

Now I'm just waiting for the price to go up!

It's not easy, fast, or cheap, but it's doable.

Thanks for the info! I will be combing through the thread you linked to above.

Quick question. I have a general purpose LLC that I opened last year, complete with a bank account at BoA. I was initially going to start a company with that LLC but ended up not pursuing that project (at all). From your research, would it be possible to re-task that LLC as my IRA LLC?

[jzcjca00]

Thanks for the info! I will be combing through the thread you linked to above.

Quick question. I have a general purpose LLC that I opened last year, complete with a bank account at BoA. I was initially going to start a company with that LLC but ended up not pursuing that project (at all). From your research, would it be possible to re-task that LLC as my IRA LLC?

I seriously doubt it.  For one thing, the IRA LLC must be 100% owned by your Roth IRA custodian FBO your Roth IRA account.  The paperwork for the LLC (articles of organization, operating agreement, or whatever is required in your state) must say certain things.  I'm guessing that it's way easier to set up a new LLC than to modify the existing one to meet all the requirements.

You have to follow certain rules when you set up and run the IRA LLC.  For example, you cannot use personal funds as the initial deposit to the bank account.  I'll bet your existing LLC has already had several such transactions which are prohibited to IRA LLCs.  You need a clean start.

The guy who helped me was Avi Kaufman of Broad Financial at 845-352-3000.  He and his staff helped me get through all the paperwork.  They specialize in setting up self-directed IRAs in the form of IRA LLCs, and they know what they are doing.  I checked my records, and it was about 3 weeks from the time I first contacted Broad Financial until my first Bitcoin purchase through the IRA LLC.  However, I did pay extra for expedited processing, as I was afraid the price would start back up before I bought in.  So it might take you longer.

[BTCtrader71]

The guy who helped me was Avi Kaufman of Broad Financial at 845-352-3000.  He and his staff helped me get through all the paperwork.  They specialize in setting up self-directed IRAs in the form of IRA LLCs, and they know what they are doing.  I checked my records, and it was about 3 weeks from the time I first contacted Broad Financial until my first Bitcoin purchase through the IRA LLC.  However, I did pay extra for expedited processing, as I was afraid the price would start back up before I bought in.  So it might take you longer.

The guy in this article also used Broad Financial
http://coinchomp.com/2014/03/03/invest-bitcoin-within-tax-sheltered-retirement-account/
and says it cost about $1500 to get it done within one month. Does that sound about right to you?

[jzcjca00]

The guy who helped me was Avi Kaufman of Broad Financial at 845-352-3000.  He and his staff helped me get through all the paperwork.  They specialize in setting up self-directed IRAs in the form of IRA LLCs, and they know what they are doing.  I checked my records, and it was about 3 weeks from the time I first contacted Broad Financial until my first Bitcoin purchase through the IRA LLC.  However, I did pay extra for expedited processing, as I was afraid the price would start back up before I bought in.  So it might take you longer.

The guy in this article also used Broad Financial
http://coinchomp.com/2014/03/03/invest-bitcoin-within-tax-sheltered-retirement-account/
and says it cost about $1500 to get it done within one month. Does that sound about right to you?

Yes, that sounds about right.  It varies by state.  And there are also many other fees -- expedited processing and wire transfers if you want it fast, overnight delivery, numerous fees to the custodian, it adds up.  It might be closer to $2,000 once you add in all the additional costs.

It's not fast, easy, or cheap, but you can legally avoid capital gains taxes, and if the price goes way up, it will have been worth it!

[redwhitenblue]

I had $10,000 in ROTH IRA basis money (money I invested in a ROTH IRA acct and paid taxes on) that I pulled out penalty-free in January to invest in Bitcoin. My original thought was that I was going to treat this as a regular capital gains type investment - no tax shelter.

Now that the IRS has come out and said that Bitcoin investments are to be treated like stock market investments, it sounds like my $10,000 investment can grow and be cashed out tax-free since my withdrawal is really just a movement of my investment from one vehicle (the stock market) to another similar investment vehicle (Bitcoins).

Thoughts?

It sounds like you invested $10,000 in a Roth IRA several years ago, have had earning/gains on this investment (it is now worth more then $10,000) and now that you have had your Roth IRA open at least 5 years and are above the retirement age ave withdrawn these funds. You have subsequently invested these funds in BTC.

IMO the best and simplest way to invest in BTC in a retirement account would be to invest in a BTC EFT (once they start trading). This will allow you to avoid probably several thousand dollars in expenses in setting up an entity to own the BTC and high recurring expenses in managing the entity that owns the BTC.

[jzcjca00]

I had $10,000 in ROTH IRA basis money (money I invested in a ROTH IRA acct and paid taxes on) that I pulled out penalty-free in January to invest in Bitcoin. My original thought was that I was going to treat this as a regular capital gains type investment - no tax shelter.

Now that the IRS has come out and said that Bitcoin investments are to be treated like stock market investments, it sounds like my $10,000 investment can grow and be cashed out tax-free since my withdrawal is really just a movement of my investment from one vehicle (the stock market) to another similar investment vehicle (Bitcoins).

Thoughts?

It sounds like you invested $10,000 in a Roth IRA several years ago, have had earning/gains on this investment (it is now worth more then $10,000) and now that you have had your Roth IRA open at least 5 years and are above the retirement age ave withdrawn these funds. You have subsequently invested these funds in BTC.

IMO the best and simplest way to invest in BTC in a retirement account would be to invest in a BTC EFT (once they start trading). This will allow you to avoid probably several thousand dollars in expenses in setting up an entity to own the BTC and high recurring expenses in managing the entity that owns the BTC.

I'm predicting that once the ETF is available, making it much easier to invest in bitcoins, that many more people and institutions will take positions, which will cause the price to rise.  In fact, I expect the price to rise in anticipation when it's announced that the EFT has been approved and will soon be available.  The question is, how much of the run up will you miss by waiting for the EFT to become available?

[BitcoinLlama]

If you're planning on holding onto BTC there is a good chance that by the time you want to sell you can purchase whatever you want with them. So maybe just holding btc now in such an account is viable.

[Ron~Popeil]

This thread is an excellent read. With a Roth do you still get to deduct the upfront investment as well? Or is that just for a regular IRA?