So you’re convinced. Bitcoin and cryptocurrency are the wave of the future (or at least you hope to make a fortune trading the swings), but the new tax law that you’re supposed to calculate your gain and pay taxes on every trade is cramping your style. Well, you could avoid paying taxes if you owned and traded the cryptocurrency inside of a tax deferred retirement account (or better yet, a Roth IRA so you never pay taxes on the gains).
But doing so is a bit complicated. For years I had heard of “self directed” IRAs that allowed you to invest in real estate (but my IRA didn’t have enough money to do that). Later on, I learned about how you could invest in gold through an IRA or the IRA could even start its own LLC that you manage (also known as a checkbook IRA). But I never had a reason to want to do so.
Enter Cryptocurrency. No matter whether you’re HODLing, trading, or running masternodes, the potential upside is enormous, and you don’t need a huge amount of money to get started. Now there’s a reason to put that arcane knowledge to use. What follows below are the things I’ve learned by doing this process myself.
Overview of the IRA/LLC process
- First you’ll need a self directed IRA with a trust company that allows IRA/LLCs also known as checkbook IRAs. So find one with minimal fees that you trust, and open an account.
- Find an attorney who specializes in this sort of thing to create your LLC.
- Once your LLC is created you need
- Request a bank check sent to your house from the IRA in your LLCs name
- Open a bank account
- Open a Coinbase/Gdax account in your business’ name (and trading accounts on exchanges like Binance, and Bittrex, and Kucoin (affiliate links on Coinbase and Binance)).
- Wire the money from the bank account to Gdax.
- Trade your heart out.
Step 1: The first step is to open a self directed IRA
You’ll need to open a self directed IRA with a custodian that allows IRA/LLCs. My personal preferences are:
- Custodian has an online sign up (I HATE paper forms)
- Low fees
- Allows you to pay maintenance fees with a credit card
Due to anti-kickback laws, no one you deal with can “recommend” a service to you. So if you already selected an attorney, they’ can’t recommend an IRA custodian, and vice versa. But perhaps if you worded your question in the form of “which companies are the easiest to work with?” they might be able to answer.
Based on these two criteria, I selected Kingdom Trust, but in their 2018 updated fee schedule it looks like they eliminated the IRA/LLC option, and the regular self directed IRA option has a percent of portfolio based fee, which simply doesn’t work for me.
They’re pretty much all going to charge an annual (or more often) maintenance fee, check fee, wire fee. They often charge per “asset” within the IRA, but the only asset should be the LLC you’re going to form.
- Fill out the Application for new account form
- You need to fund the account in some way. Ideally a large chunk, like say $5000 or more, but whatever you can do that they will accept will work.
Step 2: Have an attorney form your LLC
You can begin this step while you’re waiting for the IRA to fund. I consulted with two attorneys (Mat Sorensen and Nick Spradlin). I ended up going with Nick Spradlin mainly for the lower price and because he has offices in Florida. This step took about two weeks.
Note: Technically your IRA owns the LLC, so the IRA should pay the attorney, not you.
You WILL need a Tax Id number for your LLC, so it’s easier to pay the attorney to file it for you than for you to do it yourself (IMO). It’s also easiest to name your LLC: FirstName LastName IRA LLC. That way when you go to the bank, they immediately see the relationship. You can also pay for a DBA (doing business as fictitious name) but I didn’t opt to. I highly recommend using an “e-book” rather than a traditional printed binder.
You can also pay for the attorney to be your registered agent within the state of registration (which should be your state of residence). This makes a lot of sense when you’re investing in real estate and there may be legal issues with subcontractors or tenants, but I’m not sure it’s such a great deal if you’re just buying Bitcoin.
A couple weeks later you’ll get an e-mail with several things.
- Articles of Incorporation where the attorney filed your LLC with the State
- An LLC seal
- An LLC membership certificate
- Your Tax ID number
- And your LLC Operating Agreement, Minutes, and Ledger
Step 2b: What do you do with all this LLC stuff?
- First you need apply your company seal to the Membership Certificate. There are instructions on how to do it using Adobe Acrobat.
- Then print out the Certificate and sign it.
- Print the signature pages from the Operating Agreement and Minutes and sign them. Scan everything back together and assemble the documents into one big file. (Or print them all and then just scan them together.)
- Send them all to your IRA Custodian (see Step 3 below)
Step 3: Tell your IRA Custodian to invest in your IRA/LLC
This will likely involve several forms. For the Custodian that chose, I had to fill out an LLC agreement form where I told them the name of my LLC and provided all of the documents above, and then an Investment Authorization “Kit” (series of forms) authorizing the IRA Custodian to “invest” (send money) to the LLC. At this time, the safest thing to do is request a check made out to your LLC’s name sent to your address.
The reason for this is that you’ll need to have some money to start a bank account. None of the local banks I talked to would let me start the account with a zero balance and then wire the money in. The alternative would be to deposit the minimum with your own money, wire the funds from the IRA, and then withdraw the minimum deposit once the wire goes through, but the IRS might look down on that, so better safe than sorry.
Bank Secrecy Act (Currency and Foreign Transactions Reporting Act)
As part of opening the bank account, they’ll ask you a series of questions required by the Secrecy in Banking act. One of them includes whether you are creating or exchanging virtual or digital currency. To the best of my reading, the answer is no. (If you answer yes, they won’t let you open the account by the way.) DISCLAIMER: I am not an attorney, nor do I play one on TV, nor did I sleep in a Holiday Inn last night. This is not advice nor a legal opinion. The best that I can see is that if you’re in the business of exchanging (like Bittrex or Coinbase) or you’re going to be creating a cryptocurrency (like Ripple) then you probably should say yes. But if you’re just buying, holding, and selling cryptocurrency, you should be okay saying no.
Bank Account: LLC Owner
Now this one is tricksey. Technically the owner of the LLC is something like “IRA Company Name Custodian FBO Your Name IRA Account XXXXXXX.” At first I tried opening an account with CapitalOne Spark Business because there’s no minimum balance, and they don’t charge your for the first 5 outgoing wires. (Who wants to be fee-ed to death?) But their online form fritzed out when I tried to enter the LLC owner. It also wanted a birthday for the owner who didn’t have a birthday, because the owner is an entity, not a person. When I called them the person I spoke to on the phone was about as helpful as the online form.
Next I tried Wells Fargo, and their online app let me complete it and choose that the owner was an entity, and that I was a “key personnel with executive control.” Then it gave me some forms I had to sign and turn into a local branch.
The next day I took the forms to a local branch, and… the form was malformed, and they couldn’t find my app in the computer. The bank rep called corporate, and turns out I had to re-apply through his system. When it came to the “owner” question, he said, “For our purposes, you’re the owner; I know it’s not technically correct, but you sign the checks, and the EIN flows through to your SSN.” (or something like that)
Now, sign the forms; give them copies of the LLC documents (same as in the step above); give them the endorsed check you requested above…
Congratulations. You are now the proud owner of a fully funded IRA LLC. Don’t forget to create an online account. You’ll need it in the next step.
Step 4: Get a Coinbase account
Set up a Coinbase account. This part is a bit confusing. If you click on support and ask Coinbase about Business accounts, the only guidance that you can get is “open a Gdax account” for businesses and trading professionals. However, when you go to Gdax, it just has you “create a Coinbase account.” If you click on Contact Support, it says that what you’re asking for isn’t a support priority and won’t let you continue.
- Put in your name, and the e-mail address of your business, and a password. (Note: there is never any place to actually put in your business name.)
- Confirm your account with the e-mail they sent you.
- Set up 2 factor authentication
- Upload your Driver’s License (it took about five minutes for them to verify)
- Now connect your bank account account
- This is now significantly improved from earlier.
- You select your bank from a list of partners.
- Log in using your bank’s credentials that created in the step above.
- Verify that it’s you with a text message
- Now go to Gdax.com again.
- It will ask you to add an account, but if you try it will say that it’s already linked, so just say continue.
- You’re DONE.
- Go to you’re USD wallet and click the down arrow (deposit)
- Click on the wire instructions and call your bank to set up a wire. If you’re requesting early in the day, the funds should be in Gdax the same day. If you’re investing more than $2000, it’s probably cheaper to wire the funds than to use the ACH function in Coinbase. Also, your wire has a good chance of getting there the same day as opposed to doing it through Coinbase where you have to wait 5 days before your funds clear.
Note: (It seem that many banks will let you request a wire for up to $10,000 online or in their mobile app. If you want higher than that, then they’ll make you call or visit a branch bank. (Maybe if you bring your laptop to the bank, you could do this step immediately following opening the account and then set up your wire before you leave!)
Update: I finally found where you tell Gdax that you’re a company. It’s in the Withdraw section when you ask them to increase your daily withdrawal limit.
While you’re waiting for your wire to go through, don’t forget to sign up for accounts at the exchanges you’re planning on trading on with your IRA’s e-mail address.
Be very careful NOT to engage in any prohibited transactions. If you’re audited (the IRS says that it’s targeting IRA/LLCs), your IRA could lose IRA status forever.
The IRA will need to pay an annual registration fee with the state you incorporated in, so save some money for that.
You’ll also need to reserve some money for the IRA account fees, and Bank account fees (or maintain the minimum balance to avoid the fees).
You’ll need to provide an annual valuation of your LLC to the custodian that is prepared by a qualified third party (i.e., NOT you or a direct relative).
Overall the process is not that hard, but if you don’t know what to expect or what the right words are, it’s easy to feel stupid and lost.
Dealing with Nick Spradlin was very easy and quick despite my not paying for the expedited service. I’m not sure if he works in all states, but I know he advertises in Florida and Texas. (If I had paid for the expedited service, I might have been able to catch this recent dip and pick up some Litecoin for $150 and Ether for $950.)
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