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 have complete ownership of the cryptos. Unfortunately, when it comes to a Crypto IRA, holding your IRA private keys is not so simple.
Why Are Crypto Private Keys So Important?
A crypto private key is only used to sign transactions and prove you own the related public key. A private key is a large, arbitrarily generated string of alphanumeric characters with hundreds of digits. This secret number acts as a password to protect a cryptocurrency owner and is the key to unlocking access to the virtual vault that holds your cryptocurrency.
Most crypto investors are not aware that when purchasing cryptos on a centralized exchange, such as Coinbase, the cryptos acquired are automatically stored in your exchange-hosted wallet, which is generally custodial controlled. In other words, the exchange has control of your crypto private keys, which means that you do not actually control the underlying crypto.
The Legal Landscape for Holding Crypto IRA Private Keys
IRC section 408(m) generally prohibits the investment of assets of an IRA or any retirement plan in certain “collectibles” including precious metals; however, there are exceptions for certain coins (American Eagle coins meet this exception) and bullion. With respect to bullion, the exception applies “if such bullion is in the physical possession of a trustee [which is a bank or qualified non-bank custodian].” Hence, holding IRS-approved metals or coins in a safe at one’s personal residence clearly violates IRC 408(m).
IRS Notice 2014-21 treats cryptos as property, just like stocks or real estate. Hence, an IRA or 401(k) plan is permitted to purchase Since crypto assets are digital assets and are not considered a collectible, like gold. Hence, when it comes to holding cryptos owned. With a retirement account in a cold wallet, what does the IRS say?
IRS Position on Holding Crypto in a Cold Wallet Owned by a Retirement Account
The IRS has not formally issued a public statement on the ability to hold cryptos owned by a retirement account off an exchange in a cold wallet. However, there are several cases, including____, which have focused on the requirement that IRA-owned assets must not be held in the personal possession of the IRA owner in an unfettered manner.
The McNulty Case
In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), the tax Court ruled that an individual could not hold precious metals owned by a self-directed IRA in their personal possession. The facts were not at issue and the taxpayer clearly violated Internal Revenue Code (“IRC”) Section 408(m) prohibiting the possession of Bullion metals and coins anywhere outside the “physical possession” of a United States depository.
The Tax Court made it clear in its opinion that an IRA owned must not have personal possession of an IRA-owned asset. The following is an excerpt from the Tax Court’s opinion in McNulty:
“A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. Sec. 1.408-2(e), Income Tax Regs. A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets. See sec. 408(h) and (i); sec. 1.408-2(e)(4), (5)(i)(2), (iii), (vii), Income Tax Regs. The presence of such a fiduciary is fundamentally important to the statutory scheme of IRAs, which is intended to encourage retirement savings and to protect those savings for retirement. Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.”
Related: Alternative IRA Investments
IRA vs 401(k) Trustee Rules
Unlike an IRA, a 401(k) plan is a qualified retirement plan that must be established by a business. An IRA is essentially a trust created for the exclusive benefit of an individual or his/her beneficiaries. In the case of an IRA, the trustee of the IRA is the bank, financial institution, or state-chartered trust company that is authorized to administer the IRA.
Whereas, a 401(k) plan is a trust created forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees. A 401(k) plan is created by an employer (grantor of the trust). The plan’s assets must be held in trust to ensure that the assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions. plan document is a written document that serves as the foundation for day-to-day plan operations.
As per Internal Revenue Code (“IRC”) Section 408, a trustee of an IRA must be a bank, financial institution, or state-chartered trust company. In contrast, in the case of a 401(k) plan, a trustee of the plan can be an individual who would take title on behalf of the 401(k) plan in the capacity as “trustee of the plan. For example, in the case of a solo 401(k) plan, the title to plan assets would be titled as follows: John Doe Trustee of the ABC LLC 401k plan.
Turning back to the question of how one can hold cryptos owned by a retirement account in a cold wallet off an exchange, case law is clear that one cannot do this in an IRA (see McNulty case above). However, the McNulty case focused exclusively on IRAs. Unlike an IRA, a 401(k)-plan trustee is authorized to hold plan assets in trust for the benefit of the plan’s participants.
The IRA Financial Cold Wallet Crypto Solo 401(k) Plan Solution
The IRA Financial cold wallet crypto Solo 401(k) plan solution will allow a Solo 401(k) plan trustee to hold 401(k) plan-owned cryptos off the exchange and in a cold wallet.
Who Can Setup a Solo 401(k) Plan?
A Solo 401(k) plan is not a new type of retirement plan. It is a traditional 401(k) plan covering only one employee. In general, to be eligible to establish a Solo 401(K) plan, one must be self-employed or have a small business with no full-time employees (over 1000 hours during the year) other than a spouse or other owner(s).
How Does the Solo 401(k) Crypto Wallet Solution Work?
The IRA Financial Solo 401(k) cold wallet crypto solution will allow a plan participant to purchase cryptos using 401(k) funds and then hold the cryptos in a cold wallet off the exchange. The reason that a Solo 401(k) plan trustee can hold cryptos off in an exchange in a cold wallet and not an IRA relates to the nature of the role of a 401(k)-plan trustee.
In the case of an IRA, the IRA custodian is the trustee of the IRA and is required to custody IRA assets. Whereas, regarding a Solo 401(k) plan, the trustee of the plan is required to hold plan assets in trust on behalf of the plan participant. The trustee of a 401(K) plan may be an individual. Below is an excerpt from the IRA Financial 401(k) plan document which has been approved by the IRS:
Powers of the Trustee
The Trustee will have the power, but, in the absence of proper direction from the Plan Administrator, not the duty, to take any action set forth below:
- purchase or subscribe for securities or other property and to retain them in trust; to sell any such property at any time held by it for cash or other consideration at such time or times and on such terms and conditions as may be deemed appropriate.
Therefore, based on the IRS-approved 401(k) plan documents, a Solo 401(k) plan trustee can hold 401(k) owned property, such as cryptos, and “retain them in trust.” Whereas, using a self-directed IRA would not offer the IRA owner the same right since the IRA rules require the custodian or trustee to retain full control over the assets. Hence, the IRA Financial Solo 401(k) plan cold wallet crypto solution would allow one to have 401(k) plan-owned cryptos moved off-exchange and held “in trust” by the trustee of the plan. The Solo 401(k) plan solution would seemingly not violate the McNulty ruling, since McNulty only addressed the personal possession of an IRA-owned asset, which involves different rules than what would apply to the possession plan assets by a 401(k) plan trustee.
The IRA Financial Difference
IRA Financial “literally” wrote the book on the self-directed Solo 401(k). Our founder, Adam Bergman, Esq, has written 8 books on self-directed retirement plans and over the last 15+ years has helped over 24,000 self-directed clients invest over $3.2 billion in alternative assets. IRA Financial is the leading provider of self-directed Solo 401(k) plans with “checkbook control. Our expertise and experience in designing and customizing Solo 401(k) plan solutions for entrepreneurs and small businesses is unmatched.
The IRA Financial Solo 401(k) crypto cold wallet option is the only solution that will allow one to hold cryptos owned by a retirement account in a cold wallet off an exchange.
IRA Financial’s Self-Directed Solo 401(k) solution is specifically designed and customized for each type of investment. Our Solo 401(k) tax experts will work with you to design the perfect self-directed Solo 401(k) plan solution to invest in cryptos and gain control over your private keys.
