- Yes, you can invest in cryptocurrencies through a solo 401k plan. Buying crypto through a retirement plan like the solo 401k allows you to avoid paying capital gains tax on your crypto gains, and take advantage of tax-free compounding.
- You can choose to invest in crypto through your traditional pre-tax solo 401k or your Roth post-tax solo 401k. The traditional account gives you a tax deduction on your contribution, but withdrawals in retirement are taxed as regular income. The Roth account gives you no tax breaks on your contribution, but withdrawals in retirement are tax-free.
- Not all solo 401k plan providers allow alternative investments. To invest in crypto through your solo 401k, you’ll need to find a self-directed provider that allows crypto investments, like the Carry Solo 401k.
In 2014, the IRS released IRS Notice 2014-21, which determined that cryptocurrencies are to be classified as property for federal tax purposes, rather than as currencies. Like any property, buying or selling of cryptocurrencies are typically subject to capital gains tax. If you buy bitcoin at $10,000 and it rises to $60,000, you’ll be taxed on your capital gain of $50,000.
Retirement plans like a solo 401k have tax-free compounding, meaning you don’t pay any taxes on gains, no matter how large they may be. Therefore, buying cryptocurrencies in a solo 401k is not only possible, it can actually save you a lot of money on taxes, especially if your investments “go to the moon”.
Can I buy cryptocurrencies in a solo 401k?
Yes, you can invest in cryptocurrencies through a solo 401k. While the IRS doesn’t specifically state that a solo 401k is allowed to buy and sell crypto, it’s still generally considered as allowed because it’s not listed as a prohibited investment. With a solo 401k, you get full control over what assets you invest in. The IRS doesn’t provide a list of what’s allowed, they only list a few things that aren’t allowed. Crypto is not on that list.
Buying through a traditional or Roth account
Within a solo 401k plan, most plan providers will give you two different accounts: The traditional pre-tax solo 401k and the Roth post-tax solo 401k. You get to decide which account you want to buy crypto through.
With a traditional pre-tax solo 401k, you make contributions with pre-tax dollars (income you haven’t paid taxes on yet) and receive a tax deduction for the tax year. However, withdrawals in retirement get taxed as regular income.
With a Roth post-tax solo 401k, you make contributions with post-tax dollars (income you’ve already paid taxes on) and receive no tax breaks for contributing. However, withdrawals in retirement are tax-free.
The advantages of buying crypto through a solo 401k account
A solo 401k has many benefits and tax-advantages. Here are a few that apply even stronger when you’re using your plan to invest in crypto.
The biggest advantage of buying crypto through a solo 401k is the mega-sized Roth option. You can contribute up to $22,500 into a Roth solo 401k for 2023, or up to $30,000 if you’re at least 50 years of age. That’s over 3x higher than the contribution limit of a Roth IRA.
With a Roth solo 401k, you get to withdraw your earnings tax-free in retirement. Since crypto is one of the most volatile asset classes, and gains can potentially be much larger than other traditional asset classes, holding crypto in a Roth solo 401k makes it sheltered from taxes. Even if your crypto investments grow 100,000x, the entire amount is yours with zero taxes owed to the IRS.
With a solo 401k, you don’t pay any taxes when you buy and sell assets. In other words, your money compounds tax-free. If you’re buying and selling crypto in your account, you don’t have to pay capital gains tax every time you decide to sell for a profit. All the profits are yours to invest in other crypto projects or into other asset classes besides crypto.
High contribution limit
The solo 401k has the highest contribution limit of any retirement account. In 2023, the contribution limit is $66,000 ($73,500 if you’re over 50). Only $22,500 of that can be contributed into a Roth solo 401k. However, there’s also the mega backdoor Roth solo 401k which allows you to contribute up to the $66,000 limit entirely into a Roth account.
You can rollover assets from other retirement accounts that might not let you invest in alternative assets like cryptocurrencies. You can rollover funds from any retirement account except a Roth IRA.
The best part about rollovers is that there’s no limit on how much you can rollover, and they don’t affect your annual contribution limits. You can transfer all of your funds from other retirement accounts into a solo 401k, and still be able to contribute up to the maximum amount for the tax year.
A solo 401k lets you invest in any asset class, including alternative assets. However, this feature is only available with premium self-directed solo 401k plans. Free or low-fee solo 401k plans offered by major banks and institutions do not allow you to make investments into alternative assets like crypto.
How to buy crypto with a solo 401k
To buy cryptocurrencies with your solo 401k, you basically just need to open a separate account at a crypto exchange under your solo 401k trust. Here’s how it works.
If you already have an active solo 401k account, you can skip steps 1 to 3.
1. Open a solo 401k account.
As long as you have any type of self-employed income and no full-time employees that work over 1,000 hours per year in your business (besides your spouse), you’re eligible to open a solo 401k.
Opening an account is simple. Find a solo 401k provider, get an Employer Identification Number from the IRS, and fill out the application form.
Not all solo 401k providers offer the same things. If you’re planning on buying crypto through your account, make sure that the plan has a Roth option, and the ability to do rollovers. You can compare solo 401k plan providers here.
The Roth option lets you withdraw from your account tax-free in retirement. This is the account you want to buy your crypto in.
Rollovers are the fastest way to fund your solo 401k because you can transfer in funds from another retirement account.
2. Open bank accounts under your solo 401k trust
Any cash and/or assets you hold in your solo 401k belong to your solo 401k trust. This is a separate entity from you and your business.
To separate all transactions and assets from you and your business, your solo 401k trust will have its own EIN and open its own bank accounts. Typically, you’ll have to open two different accounts: One for your traditional solo 401k and another for your Roth solo 401k.
3. Fund your solo 401k account
This is where rollovers come into play.
Once you open your solo 401k account, you can fund it by making contributions to it or by doing a rollover. If you have another retirement account, you can rollover the entire amount into your new solo 401k.
The benefits and tax-advantages of a solo 401k make it a superior retirement account than most other plans that you might already have. Additionally, rollovers to a solo 401k do not count towards the yearly contribution limit. You can rollover as much as you have in another account, and still have the full contribution room left over to add additional funds.
Any rollovers from a Roth account will get put into your Roth solo 401k account, and ideally, you would use this account to purchase your crypto.
4. Open an account at a crypto exchange under your solo 401k trust
Remember that you and your business are separate entities from the solo 401k trust. The entity buying the crypto will be your solo 401k. Therefore, you must open an account with a crypto exchange under the solo 401k trust.
If you’re only going to invest through your Roth solo 401k, then you only need the one exchange account. However, if you’re also going to be buying crypto through your traditional solo 401k account as well, then you’ll need to open an additional crypto exchange account to keep them separate.
5. Buy and sell crypto
Once the accounts are made with the crypto exchange, you can fund your exchange account through your solo 401k bank and start buying and selling coins.
Remember not to mix any of the crypto purchased by your solo 401k with your personal accounts. This is a very serious matter to pay attention to and penalties can be extremely steep for breaking the rules. For example, your solo 401k crypto cannot be sent to your personal account for any reason as that would be a prohibited transaction.
What’s the difference between investing in crypto through a solo 401k vs a self-directed IRA?
There’s been a rise in special self-directed IRA accounts that let you invest in cryptocurrencies. However, there are some major differences between investing in crypto through self-directed IRA and a solo 401k.
- Contribution limit: One of the biggest differences is how much you can contribute to the plan, the solo 401k limit being 10x larger than the IRA limit. With a solo 401k, you can contribute up to $66,000 ($73,500 if age 50+) for 2023. With an IRA, you can contribute up to $6,500 ($7,500 if age 50+) for 2023.
- Go through a custodian: The biggest limitation of a self-directed IRA is that you need to go through a custodian for all buying and selling of assets in your account. If you want to buy crypto or sell crypto, you have to instruct your custodian to buy or sell on your account’s behalf. This may be okay if you’re only investing and holding long-term assets, but if you need to make quick actions based on news or price movement, going through a custodian can add hours or days to your transaction speeds. On the other hand, a solo 401k gives you checkbook control. You have full control over the buying and selling of assets, without the need of going through a custodian.
- Full control over your crypto investments: Another limitation of self-directed IRAs is that you’re limited to buying whatever cryptocurrencies are offered by the provider. Comparatively, with a solo 401k, you can invest in whatever cryptocurrencies you like because you’re free to move around your crypto to different exchanges and protocols.
Can I move my crypto to another exchange or another wallet?
Yes. You’re free to move your crypto to any other wallet or exchange. Some people will want to put away their crypto in cold storage and others might want to transfer it to a self-custodial wallet to get access to more cryptocurrencies not available on an exchange.
Just make sure to keep everything separate from each other. For example, if you buy a hardware wallet, that wallet must be purchased by your solo 401k trust, not you. If you opened two exchange accounts, one for your traditional solo 401k and another for your Roth solo 401k, make sure that crypto in these accounts never get mixed with each other.
How long will it take for me to buy crypto with a solo 401k?
It entirely depends on the exchange’s application process. Usually, it takes a few weeks, since most exchanges require you go through a vigorous verification process.
Can I buy whatever crypto I want or are my choices limited?
You’re free to buy whatever cryptocurrencies you want. You are not just limited to bitcoin and Ethereum. Once you deposit your funds through an exchange, you’re free to move the funds around in different block chains and DeFi projects and invest in whatever protocol or token you like.
Can I buy NFTs with my solo 401k?
The IRS has released new guidelines that state NFTs will be treated as digital assets, the same way that cryptocurrencies and stablecoins are treated. Learn more about solo 401k NFT purchases.
Who owns the crypto when I buy it through a solo 401k?
Your solo 401k trust owns the crypto in your account.
I already have a personal account with an exchange? Can I just use that?
No. Your personal account is for your personal use only. Your solo 401k is its own entity and must make transaction through its own account.
In addition, the two accounts must never transact with each other. If you’re short a few hundred dollars and decide to borrow the funds from your solo 401k’s crypto wallet, that would be a prohibited transaction.
Can I use my solo 401k for crypto mining or staking?
It’s a bit of a grey area. To stay on the safe side, activities like crypto mining and staking should be avoided with retirement accounts.
Depending on the kind of mining and staking you participate in, they could be viewed as business operations and you could be hit with an UBIT (Unrelated Business Income Tax), which can be as high as 37%.