5 Secrets to Tax-Free Crypto Wealth

By Jeff Astor

Everyday investors are jumping for joy over the incredible explosion of wealth gained through cryptocurrencies. However, many remain blithely unaware of the elephant in the room: the taxman. If you have already profited with your investing, but are hazy about the tax implications, speak to your accountant. In this article, we’ll be discussing strategies for moving forward.

The truth is you can shield your gains from taxes. Current tax laws are set up to allow you to create tax-free wealth, and do it all with the backing of the U.S. government. If you’re serious about investing in cryptocurrency, then it pays to take advantage of all the legal options available. Here are five “secrets” that the standard investor may not know about, but which can really make a difference when cashing out.

#Secret #1 – The Self-Directed IRA

The first secret is a little-known investment vehicle called the self-directed IRA. If you’ve never heard of it, you’re not alone. Americans have invested over $20 trillion in retirement assets, and 98% of that can be found in regular non-self-directed accounts. These accounts are usually set up with the big brokerages (e.g. Schwab, Fidelity, eTrade, and TD Ameritrade), and once there they buy stocks, bonds, and a variety of mutual funds. In other words, they stay on Wall Street.

What happens, though, if you find a great investment that’s not offered by Wall Street? How can your retirement plan profit from that investment? Enter a self-directed plan. This can be established as either an IRA or a 401k, and it gives you the ability to put your investing dollars in assets that make sense to you.

The few investors who have (until now) utilized self-directed plans typically invest in “alternative assets” like real estate or precious metals. Other popular investments include tax liens, private companies, hedge funds and IPOs. In fact, the IRS permits just about any kind of asset in a retirement plan, with the only two exceptions being collectibles and life insurance.

Recently, though, retirement plans have seen a swing in a new direction. The newest and most explosive asset people have been placing in their self-directed IRAs is cryptocurrency. This includes bitcoin, Ethereum, as well as any and all “altcoins.”
If you know about self-directed IRAs, great. If you don’t, you can get yourself up to speed with a book I’ve written called The Ultimate Self-Directed IRA. Either way, a self-directed plan is the best approach to start building tax-sheltered cryptocurrency wealth.

#Secret #2 - A “Flat Rate” Plan

The second secret is a “flat rate” plan.

There are two fundamentally different types of self-directed IRAs: a custodial IRA and a checkbook IRA. In the custodial model, the custodian holds your money and uses that advantage to collect (and often amp up) the fees. These include transaction fees for everything your IRA does, as well as asset-based fees, which take a percentage of all the money held in the account. For instance, if you want to invest $100,000 into crypto, a custodial plan may charge 15% just for holding your money. Per year, that comes out to a whopping $15,000!

In a checkbook IRA, the fee is normally structured as a flat rate. In that case, you pay a one-time set-up fee (typically ranging between $1,200 and $1,800) and a small yearly fee (usually under $200). The checkbook IRA can provide these savings because of its unique client-centered structure. With a flat fee, it doesn’t matter if you’re investing $1, $100,000 or $100 million. Flat is flat.

And that’s really what you want to do when you’re investing in cryptos. You don’t want to keep paying ever-growing dollar amounts to some third party just because you’re investing is successful. (Asset-based plans typically not only charge a percentage of your money as a setup cost, but for any money you decide to add later.) The companies who charge this way aren’t necessarily dishonest; they may disclose all their fees up front. However, that doesn’t make it any less of a rip-off. For active investors who deal with high transactional investments like cryptocurrency, a flat rate is the only way to go.

#Secret #3 – Full Investment Control

The third secret is checkbook control, a feature which comes naturally with a checkbook IRA. This is essential in that it gives you absolute investment control for your funds. You choose the bank where your money is held, and you can freely choose any asset in which to invest. When it comes to cryptos, a checkbook plan takes it to the next level. Not only do you get to invest in the coin (or coins!) of your choice, but you also get to hold the wallet.

This is a big difference. In a custodial self-directed IRA, you do not hold the wallet. The custodian chooses the exchange, and the exchange holds the wallet. In a checkbook plan you hold the wallet, and it can be any type of wallet, hot or cold. You are never restricted to or dependent upon the storage of an exchange. You can move your cryptos into any wallet, or several different ones, as often as you wish.

In addition to holding the wallet, a checkbook plan also allows you to invest in potentially lucrative ICOs. In a custodial plan, ICOs are just not an option. Yet another “secret” that is essential for cryptocurrency investing.

Finally, it goes without saying, that checkbook plans are not limited to cryptocurrencies. If you want to also invest in real estate, or any of the other almost limited asset classes, you can do so with a properly designed checkbook control plan.

#Secret #4 – The Power of the Roth

The fourth secret is the power of a Roth IRA or 401k.

Most people have heard of the Roth, but fewer know what it is. In short, there are two types of IRAs. The first is a traditional IRA. The tax benefit offered by this kind of plan is one where the tax payments are deferred. That means that eventually you will have to pay the taxman, but you get to do so at an age when you’ll likely be in a much lower tax bracket. Hence more money in your pocket.

A Roth IRA (the same is true for a Roth 401k) also offers a tax benefit, but the returns are tax free, not just tax deferred. That’s because in a Roth, the investor pays all taxes now, not later. This results in one of the great secrets of wealth-building: Not only does the principle come back tax free, but so do the profits! Since the taxes have already been paid, whatever profits the IRA makes are totally tax free. For cryptocurrency, which has the potential to produce landfall returns, tax free is exceptionally attractive.

As an example, I helped a client sign up for a self-directed IRA in April 2016. He took $92,000 and invested it into Ethereum. About 14 months later, in May 2016, he took out over a million dollars. It happens to be that he did it with a traditional IRA. Best of all, he did so with a Roth IRA, meaning that $900,000 plus profit came back tax-free!

The power of a Roth to build real wealth is something that most wealthy people are keenly aware of, and employ as a favored investing vehicle. There’s no reason, though, that the rest of us can’t begin with a modest amount and build a nice tax-free nest egg (or empire) using the power of Roth money.

#Secret #5 – The Power of a Traditional IRA

The fifth secret is that even traditional IRAs offer cryptocurrency investors a great wealth-building tool.

There may be several reasons why people don’t make yearly contributions into a Roth-structured retirement plan. One is that if you make too much, the IRS doesn’t allow you to make Roth contributions. There’s a cap on annual salary to qualify. (You can see the guidelines here on the IRS website.)

The truth is that the salary cap is high enough that most people don’t have to worry about making too much. Nevertheless, many investors still fail to take advantage of a Roth plan (either by making yearly contributions or by converting existing traditional funds into Roth), because it’s just too hard to pay the tax right now. It can take a bite out of the budget that may not be economically feasible. The result is that many turn to the traditional IRA as the platform of choice.

For cryptocurrencies, this is still a big win. As mentioned above, the tax payments are deferred, and often reduced as a result. However, for cryptocurrency specifically there is an even greater advantage: avoiding capital gains taxes. A capital gains tax is the money the government collects for investments that show a profit. Inside an IRA (or 401k), however, profits are not subject to capital gains. Cryptocurrency investors use non-retirement funds run into this tax whether they invest long term (“buy-and-hold”) or short term as they buy and sell with the market swings. Short term capital gains taxes are especially high.

Nevertheless, when the investing is done within an IRA or 401k, capital gains taxes do not apply. When you take the money out (presumably years later) it is treated as income, not capital gains. This is a huge win, especially for the active investor.

#In Conclusion

Let’s review. There are five “secrets” that make certain investment platforms ideal for the cryptocurrency investor:

1. The Self-Directed IRA (or 401k) – This allows you to invest in cryptocurrencies (and all types of “alternative investments”) as part of your retirement plan.
2. The Flat Rate Fee – This is the most cost-efficient fee structure, because you are not paying exorbitant asset-based fees.
3. Checkbook Control – This feature of the Self-Directed IRA (or 401k) allows you to invest in any kind of cryptocurrency (even the ones that haven’t been invented yet), as well as hold the wallet yourself, giving you more choices in terms of security and investing flexibility.
4. The Roth IRA (or 401k) – This type of retirement plan allows your profits to grow tax free, not just tax deferred.
5. The Traditional IRA (or 401k) – This type of retirement plan allows you to make profits and defer the taxes (potentially for decades), as well as avoid capital gains taxes.
   These are the five secrets. If you’re not using them to build wealth, the question is: Why not? With the incredible surge of interest (and profit!) via cryptocurrencies, and with the tax-beating strategies of a self-directed IRA/401k, now is the time to take advantage.

#About the Author
Jeff Astor is VP of Business Development at Broad Financial (https://www.broadfinancial.com/self-directed/bitcoin-ultimate-ira/).
He can be reached at [email protected]