Crypto mining in your IRA, 401k, or other retirement plans will be subject to unrelated business income tax (UBIT, aka UBTI). The tax rate is 37%. IRC 511. There are some minimization strategies to use, which I’ll discuss later, but the first thing to know is that if your IRA receives crypto mining income it will need to file a 990-T tax return and will pay tax at a maximum rate of 37%.
Buying and selling crypto in an IRA, as we have helped thousands of clients do, is not subject to UBIT as the IRS has stated that crypto is a capital asset like a stock, and therefore can be bought and sold in your IRA just like stock without the gains being subject to tax. Income from crypto mining, however, is not gain from the sale of a capital asset.
WHAT IS UNRELATED BUSINESS INCOME TAX?
In short, Unrelated Business Income Tax (“UBIT”, aka UBTI, or unrelated business taxable income) is “business” income received by your IRA or other retirement accounts. Retirement accounts are designed to receive investment income, and when they do you do not pay tax on the income or the gain in the account. Unfortunately, mining income does not fall into the definitions of investment income under the tax code. Section 512 of the tax code outlines what investment income an IRA can receive that will be automatically exempt from UBIT. These types of income include rental real estate income, interest income, royalty income, dividend income from a c-corporation, and capital gain income from buying and selling an asset. When you buy and sell crypto for gain in an IRA, that is the sale of a capital asset and creates a capital gain. This type of income is exempt from UBIT as IRS Notice 2014-21 stated that crypto is a capital asset and as a result, the buying and selling of crypto results in capital gains and losses. Section 512 of the code clearly states that capital gains in your IRA or retirement accounts are exempt from UBIT. Consequently, you have no tax in your IRA when buying and selling crypto. Crypto mining on the other hand is a different type of income as it is not capital gain from the sale of an asset.
WHY IS CRYPTO MINING INCOME SUBJECT TO UBIT?
The IRS has not taken a position on whether crypto mining income is subject to UBIT and there isn’t case law or guidance that I am aware of, consequently, anyone proceeding with an IRA or other retirement account to mine crypto needs to realize that the law is not settled in this area and should be talking to their professional tax advisor. My estimation is that mining income will be subject to UBIT as the income doesn’t fall into the clear areas of investment income that we see in all other investments.
I have heard some argue that if the IRA is just buying the mining equipment and if someone else maintains it and operates it that the income won’t be subject to UBIT. I would disagree with this analysis as it doesn’t have any relevance in the tax code. Let’s say my IRA bought a bus and that my IRA paid someone to operate the bus and someone to maintain it, does that mean that the income my IRA gets from people who use the bus will be exempt from UBIT simply because someone else manages it and maintains it? Absolutely not, the nature of the income is payment for services rendered. When your IRA receives income in crypto for performing mining services on a network, your IRA is getting paid for providing digital mining services or computing power to the network. Consequently, the nature of the income is payment for the services the computer hardware offers to the network. While I wish it wasn’t the case, I just don’t see a valid pathway for crypto mining to be “tax-free”. I think it is more likely than not that crypto mining income will be subject to UBIT.
Since the tax code did not anticipate crypto and has been amended to address it, there is no exception built into the tax code to make crypto mining activity exempt from UBIT.
CONTRARY TAX ANALYSIS
I hope that there are tax professionals that can offer a contrary opinion and position that crypto mining is exempt from UBIT. I just haven’t seen it. Please reach out to me though if you have a contrary analysis from a tax professional who will stand by the opinion that UBIT does not apply to crypto mining income. I’d love to be proven wrong on this and I am always willing to learn.
Note & Minimization Strategy
As a tax attorney and someone who has been at the forefront of self-directed IRAs and crypto investing in an IRA, I’m always trying to find solutions for my clients but also want to give straight-forward tax and legal advice (even if I don’t like the outcome of the advice). I realize that certain companies and IRA investors have taken a different position but my law firm, KKOS Lawyers, and my IRA company, Directed IRA by Directed Trust Company, have taken the time to diligently research the law and we are working in this area daily. Please realize that I am a big fan of crypto and love to see people invest their retirement accounts into the assets they know and value, such as crypto. A few additional points about me. First, I bought Bitcoin and Ethereum in my retirement account back in 2017 and have been strategizing with my law firm and trust company (Directed IRA) clients on crypto IRA solutions for years. I also have the number one book on self-directed IRAs, The Self-Directed IRA Handbook, which has sold 35,000 copies and has a chapter on Cryptocurrency and IRAs and a chapter on UBIT tax. I’m a VIP contributor for Entrepreneur where I write on legal, tax, and retirement topics and have been a reference or quoted by major media such as the WSJ and Forbes on retirement account topics. I also consulted with the Government Accountability Office on their report on self-directed IRAs published in 2020 and have also trained state banking regulators and industry compliance professionals on self-directed IRA rules. And lastly, our team has helped thousands of clients use their IRA and other retirement accounts to invest in crypto and our company provides accounts that can buy and sell crypto. My partner in my law firm and co-founder of Directed IRA, Mark J. Kohler, is a tax attorney and CPA and he mines crypto with his Roth IRA. See his video here outlining the structure which involves a blocker corporation strategy. In this strategy, you pay corporate tax at 21% instead of UBIT at 37%. Crypto mining is complicated in an IRA as you need to navigate UBIT and the prohibited transaction rules. It can certainly be done but we cannot see a viable approach to mine crypto without paying either UBIT tax at a maximum rate of 37% or corporate tax at a rate of 21% (using blocker corp structure).