Understanding Crypto in self-directed retirement accounts

Cryptocurrency continues to reshape the investment landscape, offering unique opportunities for retirement savers. For investors using Self-Directed Individual Retirement Accounts (SDIRAs) and Solo 401(k)s, understanding the IRS’s stance on cryptocurrency is crucial. The IRS treats cryptocurrencies as property, making them permissible investments within SDIRAs, provided investors adhere to specific tax and reporting guidelines. Below, we will explore the IRS’s guidance on cryptocurrency investments, their permissibility in SDIRAs, and strategic considerations. City Capital IRA does not endorse any asset or investment. Information below is provided for educational purposes only.


Cryptocurrency as Property: IRS Notice 2014-21

Since IRS Notice 2014-21, issued in 2014, the IRS has classified virtual currencies like Bitcoin, Ethereum, and others as property for federal tax purposes. This classification means that cryptocurrencies are subject to capital gains tax when sold or exchanged and income tax when received as payment. For SDIRA investors, this designation is significant: because cryptocurrencies are treated as property, they are permissible investments under IRC Section 408, provided they are held by an IRS-approved custodian.

This permissibility allows SDIRA holders to diversify their retirement portfolios with digital assets, potentially benefiting from the growth of the crypto market while maintaining the tax-advantaged status of their accounts.


Tax Implications for SDIRA Crypto Investments

While cryptocurrencies are permissible, SDIRA investors must navigate specific tax rules:

  • Capital Gains Within the IRA: Gains from cryptocurrency investments are not immediately recognized, as an SDIRA is tax-advantaged, as with other IRA investments. Depending on your plan, distributions may be subject to ordinary income tax upon withdrawal.

  • Unrelated Business Income Tax (UBIT): If an SDIRA invests in a cryptocurrency-related business (e.g., a mining operation), income may trigger UBIT under IRC Sections 511–514, requiring the filing of Form 990-T.

  • Prohibited Transactions: Investors must avoid prohibited transactions under IRC Section 4975, such as using crypto assets for personal benefit or lending them to disqualified persons.


Reporting and Compliance: Form 1099-DA and Beyond

The Infrastructure Investment and Jobs Act (P.L. 117-58), enacted in 2021, mandates enhanced reporting for digital asset transactions. Starting in 2026, brokers must report transactions on Form 1099-DA, with basis reporting required for 2027 transactions. As the government attempts to regulate this rapidly growing asset class, regulations and filing requirements will surely change. SDIRA custodians will play a critical role in ensuring compliance, now and into the future.

Strategic Considerations for SDIRA Investors

  • Custodial Requirements: Cryptocurrencies must be held either by an IRS-approved custodian, or by an LLC or Trust owned by the IRA. Cryptocurrencies should never be held in a personal wallet.

  • Diversification: Cryptocurrencies offer diversification benefits but come with extreme volatility risks. As with any investment, SDIRA investors should carefully consider the implications of their investment.

  • Liquidity: Crypto is unique among alternative investments in that it is immediately liquid. Assets such as precious metals or real estate take time to liquidate, whereas gains can be captured on crypto literally at the click of a button.


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