Yes, your IRA can invest in and own bitcoin and other cryptocurrencies. Bitcoin is a form of virtual currency using blockchain technology, and can be exchanged between parties for goods and services, or for dollars. From 2011 to July 2017, the value of Bitcoin has risen from $0.30 per Bitcoin to $2,550 per Bitcoin. As a result, we’ve seen a significant increase in the number of questions from investors whether their retirement account can invest in and own actual Bitcoin or other forms of cryptocurrency.
Can Your IRA Own Bitcoin?
Well, the short answer is: “Yes, your IRA can own Bitcoin and other forms of cryptocurrencies, such as Ethereum and Litecoin.” The only items an IRA cannot invest in is life insurance, S-Corp stock, and collectibles as mentioned in IRC 408(m), which refers to tangible personal property such as “art, rugs, coins, etc.” and “any other tangible personal property the Secretary determines.” Bitcoin is certainly an intangible item by all accounts and would not be considered tangible. As a result, an IRA can own Bitcoin or other cryptocurrency since such investments are not restricted.
How Are Bitcoin Gains Taxed?
The IRS issued IRS Notice 2014-21 addressing the taxation of Bitcoin and cryptocurrency, and stated that Bitcoin and other forms of virtual currency are property. The sale of property by an IRA is generally treated as capital gain, so the buying and selling of cryptocurrency for investment purposes wouldn’t trigger unrelated business income tax (UBIT) or other adverse tax consequences that can occasionally arise in an IRA.
How Do I Own Bitcoin with My SDIRA?
There are three steps to own Bitcoin or other cryptocurrency with your IRA:
1. First, you will need a self-directed IRA with a custodian who allows for alternative assets, such as LLCs.
2. Second, you will invest funds from the IRA into the LLC. Your IRA will own an LLC 100%, and that LLC will have a business checking account. For more details on IRA/LLCs, please check out my prior video here.
3. And third, the IRA/LLC will use its LLC business checking account to establish a wallet to invest and own Bitcoin through the wallet. The most widely used Bitcoin wallet is through a company called Coinbase, and you can use your wallet on Coinbase to buy, sell and digitally store your cryptocurrency.
There are already certain publicly-traded funds and other avenues (e.g. Bitcoin Investments Trust) where you can own shares of a fund that in turn owns Bitcoin. But, if you want to own Bitcoin directly with your IRA, you’d need to follow the steps outlined above. Keep in mind, Bitcoin and other forms of cryptocurrency have significant potential in the digital age. However, as with any new market investment, make sure you proceed with caution, and don’t “bet the farm” or “go all in” on just one investment or deal.
When it comes to transferring property, such as rental properties into LLCs or your personal residence into a Trust, it can be confusing understanding whether you should use a quitclaim deed or a warranty deed. Here is a brief description of each type of deed and when they should be used.
Warranty Deed – A warranty deed transfers ownership and explicitly promises the buyer that the transferor has clear title to the property, meaning it is free of liens or claims of ownership. The terms of a warranty deed should state that the transferor “warrants” and conveys the property. The warranty deed may make other promises as well, to address particular problems with the transaction. But generally, the use of the word “warrant” means that seller/transferor guarantees the new owner as to clear title. Because the seller “warrants” clear title under a warranty deed, it is a preferred method of title transfer and should be used by real estate investors and property owners as the default method of transferring title. When transferring title from your own name to your LLC or Trust, the use of a warranty deed typically allows the title insurance you bought when you acquired the property to remain in effect.
Quitclaim Deed – A quitclaim deed transfers whatever ownership interest a person has in a property. It makes no guarantees about the extent of the person’s interest. If you are buying a property from a third-party, you would never want to use a quitclaim deed because they aren’t making any guarantee as to whether they own it or not, or if they have clear title. It would be like paying someone on the street for a set of keys to a car. Who knows whether they own the car or not? You gave them money for it, and if they do own it, you just bought it. But, if they don’t own it, then you’re out of luck and you’ll have to resolve the ownership issue with the person who legally owns it. There are limited situations where a quitclaim deed is used. In some instances, a quitclaim deed is used when the buyer and seller are aware of legal issues or defects to title, so the seller transfers their interest and the new buyer has to resolve the title issues. Another situation, perhaps more common, arises in states that have a transfer tax. For example, some states will exempt transfer taxes on the transfer of title from the owner to their own LLC, but only if it is by quitclaim deed (e.g. Tennessee). When transferring title to your own LLC, we generally aren’t worried about title issues, so the savings on transfer taxes make the quitclaim deed a better option.
Most states don’t have a transfer tax, but to make matters more complicated, some states use the term “grant deed”, California being one of the most prominent. The reality is that a grant deed can be used as a quitclaim deed OR a warranty deed. It essentially depends on the verbiage used inside the terms of the deed itself. If you see words like “warrant” and “convey,” then you probably have a warranty deed. Bottom line: Make sure that you look at the language used in the deed itself. Don’t think that because you have a grant deed you have all of the benefits of a warranty deed.
Our Recommendation – Always double check the local state and county laws regarding the type of deed to use when transferring property, and what the different types of deeds actually provide. HOWEVER, as a general rule of thumb, we recommend the warranty deed when transferring property to yourself, your trust, or your own company because we want to make sure that the Title Policy and all of its benefits transfer to the Grantee of your deed.
I had the pleasure of interviewing Kevin Harrington on our Refresh Your Wealth podcast last week. Kevin was an original shark on the hit TV Show Shark Tank and appeared on 160 episodes. He is also the founder of the infomercial, a pioneer of As Seen On TV, and a co-founder of Entrepreneur’s Organization (EO). He also took a $500M company public on the NYSE. In short, he’s the perfect person to ask on how to pitch your business, product, or investment. In the podcast you can hear Kevin provide his Top 9 tips for pitching your deal, business, or product. I’ve noted the Top 9 list below and you can check out the podcast here.
Get Their Attention. Start strong and don’t get too far into the details.
Show Problem. Why is your deal, product, or business needed?
Show Solution. What is your solution to the need?
Why are You Unique to Solve. What makes you so special? Why are you the person or company to solve this problem?
Magical Transformation. Show me how this works. Wow me with how cool this is.
Have Testimonials. Have testimonials of people who’ve experienced your company, product or service.
Irresistible Offer. Make an irresistible offer. In the case of courting an investor, make me feel good about getting my money back first. Provide a term that I get paid back my cash investment first before you take any profit. For a product or service, give me a call to action.
Use of Proceeds. If I’m investing money, tell me how the money is going to be used. Is it buying a property, inventory, funding R&D, or paying your salary? That makes big difference.
Create an Invest or Buy Now Incentive. I may be interested but why should I do this now while you have my attention. Close the deal and give me comfort that this will be okay (money back guarantee, warranty, personal guarantee).
I’ve listened to plenty of clients explain their deal and/or business and found this list to be very insightful and practical. Enjoy!
We’ve all heard the buzz words of crowdfunding, PPMs, and IPOs, but there are less complicated ways to raise money and start a business and one of the most reliable and most used methods is that of partnerships or joint ventures.
If you ‘re raising money from others in an LLC, partnership, or joint venture, you must take specific precautions in structuring your documents so that the investment of money from any member, partner, or joint venturer does not constitute a violation of federal or state securities laws. Failure to comply with the securities laws can result in civil and criminal penalties. Many real estate investments and emerging companies rely on numerous strategies to raising capital that are outside of publicly traded stock and that do not require registration with a state securities division or the federal Securities and Exchange Commission. This article addresses those strategies and outlines some of the key issues to consider when raising funds through an LLC, partnership, or joint venture arrangement.
IS THE LLC MEMBER, PARTNER, OR JOINT VENTURER CONTRIBUTING MORE THAN JUST MONEY?
The courts have widely held that an investment in an LLC, joint venture, or partnership is a security when the investor is investing solely cash and has no involvement, vote, or say in the investment. In these instances where the investor just puts in cash (sometimes called “silent cash partner” arrangements), the investment will likely be deemed a security. In a famous securities law case called Williamson, the Fifth Circuit Court of Appeals held that a joint venture contract investment is a security if the investor has little say or voting power, no involvement in the business or investment, and no experience that would provide any benefit to the business or investment.Williamson, 645 F.2d 424. As a result, to avoid triggering these factors and having your investment or business deemed a security we strongly recommend that all investors in Joint Venture agreements, LLCs, or partnerships have voting rights and that they participate in the key decision-making functions of the investment or business. Investors do not have to be part of the management team but they do need to have voting rights and need to have real opportunities to use those voting rights. For example, they could have voting rights on incurring additional debt, on management compensation, and/or on buying or selling property.
DON’T GIVE YOURSELF UNLIMITED CONTROL AS MANAGER
In most LLCs with cash partners, the person organizing the investment and running the operations is often the manager of the LLC, partnership, or joint venture and has the ability to bind the company or partnership. When making this selection as the manager, it is key that you do not give yourself unlimited control and authority. If you do give yourself unlimited control as manager, your investors may be deemed to have purchased a security since their voting rights will have been extinguished by placing to much control and power in the manager/management. What is recommended is that the members have the ability to remove the manager by majority vote and that the manager may only make key decisions (e.g. incurring debt, selling an asset, setting management salaries, etc.) upon the agreement and majority vote of the investors. While key decisions and issues should be left to the members, day to day decisions can be handled by the manager without a vote of the members/investors.
DON’T COMBINE TOO MANY PEOPLE INTO ONE LLC, JV, OR PARTNERSHIP
The Courts have consistently held that even if an investor is given voting rights and has an opportunity to vote on company matters that the investor’s interest can be deemed a security if there are too many other investors involved in the LLC, JV, or Partnership. Holden, 978 F.2d 1120. As a general rule of advice, you should only structure investments and partnerships that include 5 or less cash investors as the securities laws and the involvement of more individuals than this could potentially cause the investment to be deemed a security. When there are more than 10 investors it is critical for clients to consider structuring the investment as a Regulation D Offering and that they complete offering documents and memorandums and make a notice filings to the SEC. Many people refer to this type of investment structure as a PPM. When there are a lot of investors involved, a Regulation D Offering provides the person organizing the investment with exemptions from the securities laws and can allow someone to raise an unlimited amount of money from an un-limited amount of investors.
In sum, there are many factors and issues to consider when raising money from others in an LLC, JV, or partnership and it is crucial that you properly structure and document these investments so that they can withstand these challenges of securities law violations. For help in structuring your investments please contact the law firm at 602-761-9798
The Wall Street Journal recently reported on the radio advertising that promotes an ability to store gold owned by a self-directed IRA at the IRA owner’s own home. Based on the Journal’s reporting and investigation, the IRS issued a statement warning against such storage. I’ve written about this topic on a number of occasions and our firm has always recommended against home storage for precious metals owned your IRA or your IRA/LLC.
The recent statement by the IRS against home storage is an important development and one that all self-directed IRA investors who own precious metals should be aware of. Keep in mind, there are two rules that apply to precious metals owned by an IRA.
First, the precious metals owned by an IRA must qualify under IRC § 408(m)(3). In short, these rules approve certain specifically approved coins (e.g. American Eagles) and gold, silver, platinum, or palladium that meet certain fineness requirements. Check my prior article for more detail as not all precious metals qualify to be owned by an IRA. In addition, Chapter 12 of my book, The Self Directed IRA Handbook covers the subject in detail.
And second, qualifying metals must be stored in accordance with IRA rules. Precious metals must be stored with a “bank” (e.g. bank, credit union, or trust company). Personal storage of precious metals owned by an IRA is not allowed. A broker-dealer, third-party administrator, or any company not licensed as a bank, credit union, or trust company may not store precious metals owned by an IRA. Additionally, an IRA owned LLC (aka, IRA/LLC) is subject to the same storage rules and must store metals the LLC owns with a “bank”.
If an IRA purchases precious metals that do not meet the specific requirements of IRC § 408(m)(3), then the precious metals are deemed collectible items. As a result, they are considered distributed from the IRA at the time of purchase. IRC § 408(m)(1). Similarly, if the storage requirement is violated, then the precious metals are also deemed distributed as of the date of the storage violation. IRS Private Letter Ruling 20021705. The consequence of distribution is that the value of the amount involved is deemed distributed and is subject to the applicable taxes and penalty.
Given the warning against home storage from the IRS, self-directed IRA owners should think twice before storing precious metals owned by their IRA or their IRA/LLC in their home.
For a detailed legal analysis, please refer to our Whitepaper on the topic found at the link below.
In 2012, the JOBS Act amended the rules for private placement offerings (aka “PPMs”) to allow companies to advertise and solicit their offerings to prospective investors. Under prior law, a PPM could not be marketed or solicited to people whom the offeror did not have an existing relationship with. Hence, the use of the word “private offering” in the labeling of these types of investments.
This new type of offering allows advertising and general solicitation and is known as a Rule 506 (c) Offering. Under Rule 506 (c), the company raising money could create a website soliciting the funds, or they could hold seminars or meetings with potential investors and could solicit the investment of funds from those in attendance. This is a significant change to the prior offering rules that clearly prohibit such activities.
Under the new Rule 506 (c) Offering there is one hitch: the person raising funds may only accept funds from accredited investors. An accredited investor is someone who has $200K in annual income ($300K if married) or $1M in net worth (excluding equity in home). The accredited investor status must be documented by the investor or certified by a third party such as an accountant or financial planner. This verification rule is a new requirement for Rule 506 (c) Offerings and is ALWAYS required if you make general solicitation and marketing efforts for investors.
Under the traditional Rule 506 offering, now known as Rule 506 (b), you may not make general solicitations for investors and that is the major downside. However, you may raise money from up to 35 unaccredited investors per offering and that is something you cannot do under the new Rule 506 (c). Keep in mind, the offering must remain private. So, moving forward, those seeking to raise money under Regulation D approved offerings have two options. First, raise money under the current rule and you can accept up to 35 unaccredited investors but are restricted from advertising. Or, second, only accept money from accredited investors but be allowed to advertise the offering. You don’t get both options in one (advertising and unaccredited investors) but at least you now have another option in being allowed to advertise and solicit under the new rules.
Here’s a quick chart the outlines the two Rule 506 Options. The key differences are highlighted below.
Rule 506 (b)
Rule 506 (c)
Total Amount You Can Raise
Offering Docs Required
Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Un-limited accredited investors and up to 35 unaccredited investors who are sophisticated enough to invest.
Accredited investors only. Unlimited accredited investors. Must verify they are accredited.
Marketing of Offering
Must remain private. Can only market to persons with an existing relationship.
Marketing and general solicitations are allowed. You amy market via websites, e-mail campaigns, and at events or meetings.
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