EP 9 – Investing in Bitcoin and other Cryptocurrency with a Self-Directed IRA or Solo(k)
Tax lawyers Mat Sorensen and Mark Kohler explain how you can own Bitcoin and other cryptocurrencies with a self-directed IRA. They outline the legal and tax issues when buying outside an IRA and how a retirement account such as a self-directed Roth IRA can be tax efficient. They outline the process of rolling over funds to a self-directed IRA, investing them into an LLC (IRA/LLC) and linking the LLC bank account to a wallet/exchange, and then using those dollars (fiat currency) for cryptocurrency on an exchange. They also cover the commonly asked storage questions and tax reporting items that commonly are asked.
Mat Sorensen: Welcome, everyone, to the directed IRA podcast with Mat Sorensen and Mark Kohler, we are back from a short break. It wasn’t very long. I know you missed us, but we’re back with an amazing episode.
Mark Kohler: I don’t know if we could call it vacation because the end of the year for us is worse than April 15th for any accountant on the planet, because so many tax strategies that have to be done before year end.
Mat Sorensen: Retirement account deadlines. There’s so much going on. And there’s like holidays in there, like New Year’s and Christmas. I forget what days those are. But they’re in there.
Mark Kohler: Yeah, I guess they were a blurr. And you know, it’s funny, we call it a vacation, but in Europe that’s what I want is a holiday. When people in Europe take a holiday, they disappear. Me American vacation. I got my laptop by the pool. It’s miserable. So we need a holiday Mat a real holiday.
Mat Sorensen: So like a holiday in Spain. The Counting Crows on a holiday in Spain.
Mark Kohler: Oh, yeah, I like it. All right. Well, for those of you that might be new to our show, we try to keep this interesting fun and a little bit of edutainment. And we are excited to talk about this cryptocurrency topic. It’s huge. I mean, Mat, when you first wrote an article on this, it was nuts. What’s happened since?
Mat Sorensen: Yeah, 2017 is when I wrote my first article on it because I had a ton of clients asking, can I buy Bitcoin and other cryptocurrency with my IRA? And I was like, I don’t know, let me look into it. And I started researching and I got the legal rules down and then I was like, I don’t even know how to tell people to do it. So I had to go do it myself. It’s turned out to be the most valuable research project I ever did.
Mark Kohler: I know. And yeah, and as my partner, he didn’t include me on that project. He was like, no, I didn’t know.
Mat Sorensen: For all I knew, I was like I just chalked it up to a learning experience back then. So but I did it with my retirement account. Which owned an LLC which had a wallet on Coinbase. We’re going to walk through this throughout the show. But, you know, since then, I’ve got a whole chapter in my book in 2018 on How to Buy Crypto with your IRA. And we’ve had lots of clients. I can’t tell you how many clients I’ve talked to that have a million dollar account because they bought crypto back in the day. And my first video when I did it, you know, Bitcoin was $2,500 a bitcoin back then. And I was talking about in the video, this is crazy. Can you believe it’s $2,500 per bitcoin and it was like 44 cents three years ago and now it’s like 30 to 40 grand per bitcoin. So who knows. Who knows. And this is probably a dark time for you know, Mark and I are both lawyers. We’re tax lawyers. Mark’s also a CPA. We have our trust company Directed IRA. So this is probably time for our disclaimer to say. You make you can buy it. We’re going to talk about how you can do it, whether you should do it is another question not asked, not one we’re going to answer.
Mark Kohler: Yeah. Yeah. And one other just kind of note or disclaimer. Not really disclaimer, but note. I’m grateful all of your watching or listening and I should point that out for audio listeners. We are on Stitcher, Spotify, iTunes, but we’re also recording on YouTube. You may be watching this video from our website DirectedIRA.com. And I’m going to use the whiteboard here in a minute as Mat starts to talk. I’ve been practicing my, you know, paint by numbers and crayon drawings with my nieces, so we’ll see how it goes. But you may want to watch this on YouTube and check out the whiteboard presentation of some of these thoughts, because visually, it can really come together. But when you go out to Google, you have to be careful what information you trust on these types of topics. Be careful of the e-books you could download and people that are just trying to cash in on this industry when they’re not licensed as an attorney or CPA or tax advisor, nor do they own or operate a trust company or custodian. They’re just out there trying to sell a cool idea and be careful. And I say this humbly, but I want you to feel like you’re in the right spot. No other there’s no one else in the country that are tax lawyers that have sold more books on this topic, have more YouTube views and more podcast listens on bringing that Self-directed IRA topic to the masses and incorporate in your overall plan. Because we don’t want to just talk about Self-directing Crypto. You’re an expert out there, five or ten, but we’re bringing the whole thing together. How does it fit into your trust, your retirement plan, your business, your kids, your family, your hair, the legacy you might be leaving? So I think you’ll really find this this video and podcast helpful.
Mat Sorensen: So, yeah, I mean, we’re kind of a rare species, right?
Mark Kohler: Oh, yeah. Oh, yeah. I mean, you may see we’re spotted white leopard. You can even say that.
Mat Sorensen: But yeah, that’s our that’s our rock band name too two spotted white leopard. We need to go out. Yeah.
Mark Kohler: Mat and I’ve got a good one. I got a good one. OK, so this year. Oh my gosh. This just came to me. We’re doing you’ll hear more about this in the future folks. We’re going to have our two semi-annual conferences. They will be broadcast virtually. We’ll see how covid goes. We’re hoping we can have one or more, both of them in person, throw in a little golf tournament and some fun and some nice weather, but we’ll see how it goes. The first one’s in April. The second one is in October. We’ll get you more details on it. And there on our website, DirectedIRA.com. But those workshops Mat we should call it, the two spotted white leopard tour, you know, or something, you know, that we could use t-shirts?
Mat Sorensen: I think so. You think we can have some cool opening acts, too? You know.
Mark Kohler: We could sell passes to the ladies to come back after the show. That was totally inappropriate. I’m sorry. I just think of you know, I grew up in the 80s, so I’m thinking of all those rock bands. And, yeah, it was out of control. Yeah. Sorry, ladies, I just always wanted to be I wanted a groupie. I don’t want to be a groupie. I wanted groupies maybe. Yeah. How many tax attorneys out there have groupies? This could be it a excuse to be a breakout year.
Mat Sorensen: This is really the only way. Yeah. All right. All right. Let’s get into this topic, though. And, you know, we’re going to mention Bitcoin. That’s obviously a very popular cryptocurrency. But this could work with any crypto you want to buy out there. So it’s light coin Ethereum, Ripple, Sparklecoin for the Snoop Dogg. That’s the Snoop Dogg endorsed Crypto. I don’t know if he’s still behind that, but that was he was big on Sparkle coin back in the day. So I think it’s I don’t I think it’s backed by marijuana. I don’t know. It’s not. But no, I’m just joking. So but we’re going to say Bitcoin just generically here. This could be any cryptocurrency. We’re just going to walk through the process on how you would do it. Some tax considerations maybe for buying outside an IRA even, and then and then kind of let you work from there, not answer the question of whether you should, but just talk about it. If you are, here’s how you can practically do it with a retirement account from a tax-efficient or tax-free way using your IRA or 401k funds.
Mark Kohler: Here’s what I’m going to say. I’m going to be so bold to say this. If your retirement is on track and you’ve got a good plan and things are going well and you can spare two grand, five grand or whatever the zeros are in your equation, I’d say I think you should consider it. You know, just it’s throw away money. You never know what’s going to happen here. You’re like, can I afford what can I afford to lose? I think that’s almost a sure thing, I need to Mat Sorensen is, you know, valuable research project. I wish I could have been a part of that was, you know, hey, I got a couple of thousand to burn. Let’s try it out. So, OK, now I say we start Mat with let’s just start with cryptocurrency as the IRS views it now? Is that OK? And then everybody will then we’ll talk about how you would self-direct it or self-directing and then bring the two together in a climactic finale for the show. OK, cryptocurrency the IRS in 2014, believe it or not, the IRS notice right here. Notice 2014-21. They tried to be at the forefront on this because they didn’t want people making money in the black market and the IRS not be able to tax it. I use the black market as a kind of a funny term. Not it’s not a black market, but just kind of under the table. Cryptocurrency started to evolve. The IRS had to catch up and go, whoa, whoa, whoa, whoa. If you’re going to use this like real currency, we need a piece of it. So the term the IRS generally use is virtual currency. They like to use the term virtual currency. And here’s how I’m going to just say this in a nutshell, they treat virtual currency like a stock-bond or mutual fund in that there’s one other aspect called I’ll share in two seconds. But if you’re going to just buy a stock that’s worth a thousand and resell it for two thousand, you have a taxable gain. And the IRS says it’s the same thing for virtual currency. Whatever you buy it for, that’s your basis. And whatever you sell it for, you’ve got a taxable gain. And if you say, well, I’m not going to sell it for U.S. dollars, I’m going to sell my Bitcoin and buy a theory, I’m not taxable gain. Oh, well, I’m not going to sell it. I’m going to take my thousand dollars of Bitcoin and pay someone for a thousand dollars of services-taxable gain. Because once you use the money or sell it and you try to. And I’ve got to be careful on that last one, if I have a $1,000 of Bitcoin, I buy that stock, that’s my basis. And if I pay someone $1,500 to do services, I’ve got a taxable gain of $500 of if I buy it for a thousand and then I use it like currency to pay a subcontractor to mow my lawn or something, then there’s no taxable gain to me, but it’s income to the person that received it. But if it’s gone up in value and then I pay someone with virtual currency, that incremental gain is taxable. So before we get to this IRA thing, we’ve just got to be realizing that it’s like a stock, bond or mutual fund. Now, Mat, can I have one last aspect and I’ll let you explain self-directed. There’s this term called mining. In the best way for me to think about it is literally and I love how whoever created that word came up with it is because think of gold. If I buy gold for a thousand and I sell it for two thousand, I have a gain. If I trade that gold for something at the fair market value higher than a thousand, I pay taxable gain. If I trade it for silver, I pay taxable gain. So that’s the concept. Now, mining is the concept of buying computers and it’s a very technical procedure. We’re not going to talk about here where with these computers help break down this this block chain technology, these algorithms and equations. And you can actually find cryptocurrency or virtual currency through mining and you create something. You create a valuable coin in that clip.
Mat Sorensen: You’re approving transactions is what you’re doing. So you’re the mining process is verifying transactions. So every cryptography ledger that any cryptocurrency has, the mining activity is really more like verifying the transactions. You’re not creating new crypto or finding new crypto. You’re verifying the transactions on the ledger. And so the system agrees to pay you a fee for that. But it’s a it’s a process for a lot of people get into mining because they just buy the computers and servers that then that can actually do the work. And there’s maintenance and cost the servers and electricity and all that. But that’s your get. So you’re kind of providing a service to the network. So that’s a different type of income.
Mark Kohler: Yeah, and I apologize. I’m kind of dumbing this down into the point that you’re going to you get paid in crypto or virtual currency for doing this service inside that blockchain. So in a sense, you’re kind of and I apologize. I tried to use the analogy of mining and I should have been careful because I know someone out there is going, you’re totally wrong, Mark. I get it. I get it. But the point is, I do mining. I end up with currency, what’s my basis? And so you have to somehow figure out how much did I pay in these computers and electricity to create basis for this? But I now have currency now that’s ordinary income. At that point I have mined some and I’ve earned some sort of cryptocurrency. I called it finding, but I’ve earned this cryptocurrency. So now I have a taxable gain of the value, the fair market value of that currency. And that’s my basis. I hold it and it goes up in value. That’s cool. When you trade it or sell it or use it, you’ll pay tax on the gain. Some of you might have to rewind and listen to that. But here’s the Mat. In summary, the IRS wants to tax the use of cryptocurrency, the increased value of the currency. And if you mine and are paid in cryptocurrency or find it, you get it, then you have a taxable transaction. And if you want to ever Google and Mat article on this, is fantastic. There’s a link to the IRS tax notes of 2014. Now, I’m going to set this up for Mat Sorensen by saying this. If you don’t want to pay taxes on these transactions, you can avoid all of that headache by doing it inside a retirement account. That’s the magic here of this.
Mat Sorensen: Yeah, and that’s that was the genesis of this of clients calling me in 2017, these were a lot of the early adopters of crypto that made a lot of money and they bought it personally. Right. And so they were like, well, crap, I just bought so much of this, you know, and now it’s got a significant value. I’m going to have to pay tax when I convert it to they could just sit on it, the value can go up and they can just sit on it. But a lot of them are like, I kind of want to cash out a little bit. I mean, I bought it. 44 cents. It’s worth $2,500. I’ve had a huge gain. Tremendous. So let me cash out, get some cash. OK, but they had to pay a lot of tax. Now they’re paying long term capital gains rates that they held it over a year, but still that’s 20% federal, you know, and then the state tax, depending what state you’re in. So what a lot of those people said is, you know what? How can I not pay tax at all on this? And the easiest way to go and what we think is the Roth IRA, so have a Roth IRA by the Crypto. You know, when you have a Roth IRA, all the money you make, you pay no taxes. The money goes up. And when you pull the money out at retirement, there is no tax at all on the way out as you start using the cash. And so I could take money off the table, too, at any time if, like, crypto goes up and I’m like, man, I want to cash in and sell a bunch of this to go to regular cash, US dollars, fiat currency. You know, whatever you want to call it. Yeah, you could do that. And no taxes. That cash goes back in your retirement account and your self-directed IRA and go buy some real estate or other assets. You want precious metals or publicly traded stock, whatever you’re into. But it’s a way more tax-efficient way and it can actually be tax-free in the Roth IRA.
Mark Kohler: Yeah, love it now, Self-directing. You wouldn’t be listening to this podcast or on our website, watching the video or on YouTube if you didn’t know a little bit about it, but for 30 seconds, I can do this in 30 seconds or less. Just for those newbies and be patient, everybody. I know we’ve got some very, very skilled, educated people that have self-directed for years that want to talk crypto and Self-directing. We’re going to get there. But let me just say for everybody else, if you’re new to this concept, we’ve got other podcasts and videos you can watch in our show, on our channel, on YouTube or in the podcast history. We tried to create them in a format where we go from basic ABCD, so please go back and listen to what listen to those who watch them. But what we want to do is open up a Self-directed brokerage account for lack of a better word. I want to open an account that’s an IRA or a 401k or a SEP or simple. I may roll money in from another retirement account and that’s tax-free. There’s no penalty or taxes to roll money from another retirement account generally into any other retirement account. And I may even do new contributions into these retirement accounts. And if I’m really thinking I’m going to convert or do whatever to get Roth money, the Roth 401K or the Roth IRA is the Cadillac of all these type of accounts. But once I get the money in the account, I could you hold the account at Merrill Lynch or at a directed like a company like Directed IRA a trust company that allows you to call out audibles and change the type of investment rather than to the stocks, bonds or mutual funds Wall Street offers you. One of those might be the opportunity to structure a deal to buy cryptocurrency very affordably and very simply. So that’s what Self-directing is. Merrill Lynch and Oppenheimer. They don’t let you buy crypto. I mean, is there any of the large brokerages that do Mat? I don’t I’m not aware of any.
Mat Sorensen: There are certain trusts that are kind of like mutual funds that your IRA can buy into. You have to be a high net worth individual up most of those clients or those like broker dealers. So there are some ways to do it. But you’re kind of buying into funds and they’re actually a little tricky to get into what there’s you know, there’s a lot of options on how you can buy crypto. But IRA, using a Self-directed IRA is the best route with an LLC and we’ll explain that. So if you want to buy like a specific crypto where you own that crypto, you have the keys to that crypto and we’re explain that, it’s an important point. You want to use the Self-directed IRA and an LLC. So if your money’s at Fidelity and you say, Hey, Fidelity, I want to buy cryptocurrency with my IRA, they’re going to be like, you can’t do it. And it’s not because IRAs can’t own crypto. It’s because an IRA at Fidelity is not going to let you do it. So you’re just going to move your funds over to a Self-directed custodian. There’s 20 of them out there, 30 of them. You don’t need to know one directed IRA just come over. And then and it’s the same thing. So you’ve got a traditional IRA over there roll over to traditional IRA. It you got a Roth IRA with a rollover to a Roth IRA at directed. Old 401k roll over to traditional IRA, whatever. Now your cash is here and you’re going to say, all right, I want to invest and buy crypto. The best way to do it is using an LLC. That’s what we recommend what’s in my article and in my book when we break down here. So step one, though, is get to a Self-directed IRA if you don’t have one. Get your money from Wall Street, as Mark mentioned, where you got the stocks, bonds and mutual funds over to a self-directed custodian who will be like, you want to buy crypto, you want to buy real estate, you want invest in a startup or do private lending. All those investments are cool with the Self-directed IRA.
Mark Kohler: Ok, now I’m going to start Cory, my producer did two things. He’s turned on my whiteboard so I can start using the whiteboard and he brought me a cold. Oh. Oh. How did that sound, Rockstar?
Mat Sorensen: Man, you are you are certainly a member of two spotted leopards. Yeah. You’re going to rock star so obvious.
Mark Kohler: I should be. Which should be on tour. Tauren electrolytes, B vitamins, ten calories. I mean this stuff could not be more healthy. It is good for you. The doctor says I can have one a day. All right, now, that’s the lemonade restore, that’s what we want. That’s recovery restore sorry. That’s a recovery. All right. Now I’m going to put step one here on my whiteboard of this cool little steps and procedures that Mat’s going to go through here. All right. So step one is we want to set up. Forgive me, everybody. This is my finger here on a whiteboard on an Apple iPad. We’re going to set up the directed IRA account. So I’m going to put d i r a.. Now, this could actually be a solo 401k. It could be a simple, an HSA, a SEP, a Coverdale IRA for college. Any of those are sometimes what we call SDRP Self-directed retirement plan. So you’ve got to set up that account. And of course in our links and everything directed IRA is a very affordable place to do it. You can do it in the middle of the night, set up your new account, right online, then you have ways to get money in there. You could roll money over from another account. You could put in new contributions and you’re off to the races now once you have that new account and the goal is now for somebody to go out there, you’re like, guys, this is too basic. Now let’s take it to let’s take it to the next level. So Mat, I want to do cryptocurrency now that I have this new account up. I’ve got some money in there. I rolled it over. What next?
Mat Sorensen: OK, now step two is we are going to set up an LLC. That LLC is going to be one 100% owned by your account. So you don’t own this new LLC. You’re going to be manager of it. And we have a whole podcast on the IRA/LLC, your checkbook IRA, which, you know, you go back and watch that, but just follow us here for purposes of crypto. See, the key when you buy crypto, one of the first steps you’re going to have is you have to link a bank account to a wallet or a place where there’s going to be an exchange where you’re going to say, hey, ACH my bank account of US dollars in exchange for whatever crypto you want to buy. Let’s say Bitcoin. So like Coinbase, for example, would be a company you may use or kraken or betrix or itbit. Or there any of these providers where you can basically have a wallet and exchange are places you would go. So I’m going to have my bank account for the L.L.C.. So my IRA is going to invest cash into the LLC, which will have an LLC business checking account. That LLC business checking account is now going to be linked to where your wallet is or and or where you’re going to exchange for crypto because you’re going to trade, like I said, these dollars from your bank account for the crypto and when you want to sell, it links back the same way. I want to sell my crypto for dollars because it’s gone up and I want to take some my gain off the table here. Then that’s going to go back into US dollars in your bank account. So many of the other bought crypto. Personally, it’s the same thing where you’ve got your personal bank account maybe linked to your wallet or and or exchange. But here we’ve got it linked to your LLC business checking account that is owned by your IRA. So the first purpose of the LLC really is and why we like it for crypto is we want a bank account unique to your crypto. This is your LLC bank account. You’re the manager of it. You have 100% control of it. It is linked to your crypto wallet and you get what are called the private keys, OK? See, when you buy crypto. OK, go ahead. This is a private conversation.
Mark Kohler: Yes, hold on. A private keys. I’m going to just summarize here a little bit. We’ve got step one. Open up account and by the way, this whiteboard is looking good. I got my pen working here. Step two is the LLC set up. I would say step three is to move the money from the custodian or trust company, and our team helps you do that quite quickly. Step three, you move the money into the LLC, then the LLC opens a bank account and the money really goes into that bank account from your trust company or custodian. Then once that’s up, you have a tax I.D. number for the EIN, which allows you to go open up this coinbase or wallet account in that account, references the routing number in the bank account number for the LLC because the money has got to go into the wallet and out from the wallet. And that’s what Coinbase once they want to be able to have a very seamless way of money going in. And then when you want to convert it back to dollars or whatever, you’re going to do that Coinbase needs that a bank account set up.
Mat Sorensen: And it doesn’t need to be Coinbase. By the way, you can use other companies, yes or no use to be the biggest. Now, I will say with Coinbase, because we’ve mentioned it and it is a popular one, they are the most difficult to set up a crypto wallet for with an LLC. They basically treat you when you want to use an LLC to link to a crypto wallet on Coinbase, they treat you like you’re a hedge fund. They want all these documents and all these forms. And who are the investors in this LLC? It’s like it’s just me or my IRA. So for many of you that have done crypto with Coinbase, just personally, it’s easy. But they have a whole different process. They used to push you to Jemini Trust, which is actually where I did mine back in the day. But I’m just saying it’s a little more documentation process to use Coinbase. So a lot of people have used other places like Kraken and finance and so many other places for L.L.C.. I mean, between all of them, I don’t know. Like like I said, I’ve used Coinbase Jemini, but it was a different process back then. I’m just saying right now out there, be prepared for some forms and stuff you got to do online at Coinbase when doing an LLC.
Mark Kohler: Ok, now I want to give before we go a little further Mat. If it’s OK with you, I want to. Mention two strategies to keep in mind. One, that’s a fun strategy here. Let’s say you have a Roth IRA and you’re like, it’s I’m in and you’re like and I also have some traditional IRA money or you have no Roth IRA at all. But over in your traditional account, there might be five thousand dollars in your traditional IRA. Now, when you convert it to Roth, you pay tax on that five thousand dollars. Now it can be a little technical. And you know what? How that five thousand got there and some things like that. But in general concept, whenever you convert from traditional to Roth, you’re going to pay tax on the value of those dollars you convert to Roth. Now, in the long run, as you’ll hear on all of our podcasts and in our writings and in our books, we are a firm believer that in the long run, the Roth is going to win every time, because once you pay that conversion, you’ll never pay tax again is just gone. So that’s a really, really good thing. Now, let’s just say you go, well, I’m going to buy crypto, and if it does well, I’ll convert it to Roth, slow down Tiger, because if it goes well, you have to convert it at fair market value dollars after it goes up in value. So what the key one of the key strategies we like to talk about is if that five thousand dollars in a traditional, rip the Band-Aid off now convert it to Roth back in step one, do a conversion in here. In the diagram, you can see this little Roth conversion. You might want to run over there and take a week, go through the conversion process, get it into a Roth. Now, any upside with the crypto completely tax free or with the traditional, you either have to convert it to Roth later or pay taxes on the way out. Anything you want to add to on that strategy? Mat.
Mat Sorensen: No, yeah, that’s that’s very wise long term. Now, of course, you could convert it $5,000 in the crypto goes down to a thousand and now you’re like crap, you know, I paid tax on a higher amount. So you know the other way, of course. And so you’re counting on it. I mean, that’s the speculation part of this, obviously. And doing crypto is speculative. But from a strategic standpoint, long term, if you truly believe in the long term value increasing the Roth conversion is kind of a genius move. All right. Let me talk a couple of components of the LLC that are important. So I mentioned that you’re the manager of the LLC. So this is a single-member LLC. There’s no tax return required with the IRS that flows down to the IRA. Any taxable income just flows down to the IRA, which remember, the IRA doesn’t pay tax on crypto investing. When you’re buying and selling it and making gains, you know, if you’re mining with the IRA or IRA LLC, that’s considered ordinary income from your for your IRA. And you have to.
Mark Kohler: Let’s come back to that. Yeah, let’s come back to that. Ok, so we’re in this LLC. I’m the manager and I’m not paying any tax. Now, this is important. Everybody, whether you’re a Roth or traditional, you’re not paying any tax on all this trading back and forth between crypto and this and that. No tax as long as all the trading you’re doing is inside that LLC. But if it’s traditional IRA money, when you retire, you will pay tax on the way out.
Mat Sorensen: I’m going to pay off a salary or anything like that. There’s no compensation. We have a whole episode on that. I got a chapter of my book on the IRA/LLC, sometimes called Checkbook IRA, but we’re really using it for crypto here because we need the LLCs bank account. You need an LLC business checking account that you get with when you set up the LLC. Our law firm does the LLC setups and you can of course do an account with directed IRA for the retirement account. And it’s those two pieces you have your Self-directed IRA directed IRA does, and then your LLC, which KKOS lawyers, our law firm, will set up. OK, now, and this is separate from your personal LLC too. I’ll say if you’re like we already have an LLC now that’s your LLC that goes on your tax return as your other assets and stuff in it. This is a separate LLC, your IRA will own.
Mark Kohler: And on that note, everybody go back to the whiteboard. Let’s just quickly, as Mat brings that up, talk about the trifecta over here might be your day job. And you could have a 401k at work, can you still have a Roth IRA on the side? Yes. Don’t anybody tell you let anybody tell you that you have a 401k at work or you make too much money. You can’t do a Roth. Yes, you can. Some of you are going to hold it, Mark Kohler, Mat Sorensen, they’re idiots, they’re wrong. My accountant and I trust for years told me I can do it because I make too much money. They’re wrong. You just go out and do a little bit of research on Google and YouTube and type three words in their back door Roth Mat and I have articles and videos more than almost anyone else out there learn about the back door Roth. So you may have a day job with the W2 creating a 401k, totally separate. Then you might have an S corp or an LLC or a side hustle or a side gig. Topics we talk about on our Main Street business podcast every week. But over here on this side, you’re going to have two worlds, your pretax world or non-tax world, and then you have your post-tax world. Now your post-tax world is your LLC that’s owned by your trust that you might own a rental property in your kids go to college in it, your mom lives in it. You have rental properties in three states. You have two, LLCs. I don’t care. That’s your after-tax real estate professional strategy that we write and talk about all day long to see. This is how we love to bring the whole picture together. Your trust may own your personal residence. That’s cool. But right here in this quadrant is your self directed strategy. So you might have a Roth. Your spouse’s Roth, your kids Roth, your mom’s Roth, your dad’s Roth, and this could be a part of an LLC that we just talked about that buys crypto. So see where this fits in the overall picture. So when Mat says, remember, this is not the LLC paying for your cell phone or your annual meeting, that’s because it’s in this pretax world or no tax world. Over here we want to write off everything under the sun that’s legitimate. So remember, that’s where we’re at, this little LLC that I’ll put in red, this is our LLC that we want to remember is the same LLC that’s over here. Right, keep going. Thanks, bud. All right.
Mat Sorensen: All right, let’s talk about the private keys. This is an important part. There are some providers out there where you can buy crypto in a Self-directed IRA directly, ok. Watch out on the fees. They’re pretty pricey. But what happens in those with those companies is they’re basically buying crypto in a master account for all their customers. And then you have an account that owns a little piece of the whole master account based on how much crypto you want to buy. So they’ll basically buy it on your behalf and hold it now when you buy crypto that way. And that’s OK. I mean, that’s we’ve thought about doing it ourselves that way. The one drawback, I think, from a customer standpoint is. The keys, a lot of crypto clients like crypto, because it’s not associated with a government entity, the technology is pure in the sense that, you know, you can’t inflate crypto or anything like that, like we’ve seen with currency like crazy this year and all the governments that are bailing out with stimulus because of Covid. So they feel like cryptos are some more pure currency because it’s a limited amount of crypto on the blockchain. Well, the only way you can exchange the crypto that you own is using a private key. OK, so when you get crypto, one of the really the kind of like having the cash itself, like the key is what you enable to move the crypto to exchange it with someone else. If you don’t have the keys, that crypto is worthless. OK, so if you lose those keys or if your provider, whoever you’re using, you have a hard time getting access to those keys, you’re stuck. You can’t sell the crypto. And there’s I mean, Google. I mean, it doesn’t we get people to Google stuff. So you go to Ask Jeeves, all right and search to get whatever are being and I don’t know, whatever. But there’s so many people that have bought crypto that have lost their keys. It’s like forgetting your password. All right. You are done. That crypto is gone. I don’t care if it’s tens of millions. There is zero recourse. There is no one you can go to say, but it was mine. OK, well, where’s your keys? OK, this is like the secret bank code. When you go to the Swiss bank account that they show in the movies, if you don’t get the right numbers right, then there’s no account or whatever in ain’t yours.
Mark Kohler: Yeah, OK. I think it’s like a cashier’s check. Yeah, it’s like a cashier’s check that you drop on the sidewalk. It’s as good as cash in if you lose it or forget it, it’s just gone.
Mat Sorensen: So now on the keys, if you don’t mind the reason I like it in the LLC, there’s two to two reasons why. The first is you’re in control. So you as the owner have the full responsibility and the authority with the keys because it’s in the LLC that you’re the manager of, you’re the one that gets the keys. Your IRA custodian doesn’t even have them. They can’t lose them. They can’t get them stolen from them. And your crypto disappears. All right. That’s one reason I like the keys. The second reason is. Yeah, using the LLC because you get the keys. The second reason I like the LLC is because of the Keys as well is you can have what’s called like online storage of your keys or offline storage. Sometimes you call it cold storage. So when you have keys like Coinbase, for example, a lot of people just store their keys with Coinbase. It’s online. It’s in Coinbase is cloud. And as long as they don’t get hacked or lose your cool, you know, but if they do and they lose your keys, your crypto is gone. OK, so some people like to use an offline hardware device, which is basically a USB thumb drive to store their keys. So they put it in their computer when they’re going to use the crypto buy or sell and they pull it out when they’re done. So it’s not on the Web, it can’t be stolen. Those keys are offline in a hardware device. Now, that actual hardware device, you, as the manager of the LLC, can hold and have and the LLC would pay for that that device. There’s a number of companies out there that have them, but this is like the offline cold storage, basically, that you physically hold those keys that can transfer that crypto that the LLC has, which is actually owned by your IRA.
Mark Kohler: I love it. Mat. You’re so smart now. Well, Mat well, and here’s where Mat and I compliment each other too, because I like to be big picture person too. And let’s talk about another strategy. As you can see on the whiteboard right now, Mat’s example involved a SDRP Self-direct retirement plan opening an LLC that owned 100%. Well, let’s say you’ve got your spouse, your kids, a friend, and you go, you know what? Let’s do this together. Well, rather than open two Coinbase accounts are five Coinbase accounts and try to handle everybody’s transactions in the family. You can set up what I’ve indicated down here, a multimember LLC, not a single-member LLC, as I indicate there. So in a Multimember LLC, you go, well, why don’t we get our five family now has to be pro-rata. You can’t say, oh, I’m going to give myself 80% ownership, but I’m only going to put in 20% of the money. No, it’s got to be pro-rata. So everybody puts their money on the table and you add it up and then divide it by each contribution. So if you have one hundred dollars on the table and I put in thirty dollars, then I get thirty percent of the pie. So you can create an LLC. And this is what our law firm has been doing for over 15 years. We like to claim we’re one of the first law firms to do it and we’ve done more than anyone else. We hope we think so. But you can work with one of our tax attorneys and go. OK, I need an LLC and I’m going to put mom’s HSA in here, my kids, Coverdale IRA, my old 401K that’s now in a traditional and my spouse’s Roth. OK, cool. So you get multiple types of retirement accounts with different varying amounts of dollars. Create the LLC and boom. That is what funds the bank account right here. So now we could have two or three partners and you could fund the bank account and get to work on crypto. And if you after a year you go, I’ve had enough crypto, well keep the LLC do something else with it, buy some real estate, buy, do a note, do but invest in a small business. So this LLC isn’t just restricted to cryptocurrency, it’s just a platform. It’s your own family platform to pool money and buy crypto or anything else.
Mat Sorensen: Yeah. You like there you go. Lots of options. I’ll just give up maybe another tip or two then that I just had. One is and we’ve said Coinbase a couple of times, remember, it could be another provider, I’m saying Coinbase is kind of the hardest with an IRA LLC in many ways, but they are a big provider and you can get it done. So that’s what I’ve used. But it’s become a little more popular, these other providers for LLCs in particular, or company accounts when doing crypto. The other note I would make this just get on the practical side is. If you already own crypto and a lot of people who do it with their IRA already you’ve done crypto personally, make sure you’re doing a totally separate account. If you already have, like, let’s say, a coin base account or somewhere else, do not log into that same account and just open up another bank account that you attach that you try to keep separate. What’s going to happen is Coinbase is going to send tax reporting to your social. You do not want that. They’re going to basically Coinbase thinks this is just an LLC you own. So they’re going to send all the tax point to the IRS is if you made all this money when it’s your IRA, so make sure you set up a separate account or wallet base who are using it for using a wall or exchange or and or then you’ll set up a separate account there. You know, it can you can be the individual that verified the account so they can know your social. They have to do that for your customer. Anti money laundering rules. They need to verify who’s the underlying owner of this IRA, which can be you. But the account should be in the name of the LLC. And the tax ID of the LLC is what should be used for tax reporting purposes with the wallet or exchange that you’re utilizing, you know.
Mark Kohler: Now, I want to throw out another tip. I love this because Mat and I can be thinking about other little tips and strategies. I think all of you need to hear while we’re doing this. Let’s look at the big picture as well. A lot of people say, well, how’s my trust interplay with all this? Well, your trust is the beneficiary of your Roth IRAs, your traditional IRAs, your 401k. So I want to make sure that your trust is the foundation of this overall structure, because some people say, well, what happens if I die when I have all this cryptocurrency could be millions or hundreds of thousands of dollars sitting in my traditional or Roth IRA. What happens? Well, you go back to the IRA. What does it own? Oh, it owns an LLC that owns crypto that hasn’t been sold yet. There’s a built in gain in their, but you just died. There may be a stepped-up basis on the assets of this account so that now no one pays tax on that. And if it’s in a Roth, they’re not going to pay tax anyway. So whoever the beneficiaries of your IRA, they inherit the LLC that owns the crypto. And then so now I don’t want to imply that you don’t have what’s called income in respect of a decedent. If you have a traditional IRA and you die, you don’t get a stepped-up basis on that. But if you had cryptocurrency in your own name, you would get stepped-up basis on that and your family would not pay taxes when they sell it. But inside a traditional IRA, if you didn’t convert it to Roth, your family is going to inherit the crypto and when they sell it, they’re going to pay what’s called income in respect of a decedent because you never paid the tax. The family has to. Now, who should you make the beneficiary, maybe your spouse, maybe your trust, because your kids are too young right now and we don’t want to drop a million dollars into a kid’s lap and create another, you know, Lindsay Lohan running around out. Not by the way, I love Lindsay. I have so much sympathy for child actors and actresses being one myself. It was a long time to come back from that. It was very, very difficult. Yeah, but, you know, when I was in that life commercial at age three, it was all downhill from there.
Mat Sorensen: So, yeah, obviously. I mean, take a look at me now, everybody,
Mark Kohler: OK? But that’s where your trust is into this, too. So you want to think, where’s my next generation? Where it’s my legacy because you’re not going to maybe be able to spend all this money if it goes off the chart?
Mat Sorensen: Yeah. All right, well, let me say, there’s a lot to learn about crypto in general, which crypto to buy. You know, Bitcoin is a brand, but there’s other crypto out there, technology, you know. And so there’s so much to learn about crypto. There’s certain crypto that are backed by assets, just a lot out there. So what I would say for anyone wanting to invest is get educated. Hopefully, this gives you a framework of knowing how you could do it with an IRA, why maybe a Roth IRA would be the most tax-efficient way to do it. For those of you that are concerned about taxes and want to build a, you know, a tax-free store of wealth, you can live on in retirement. We, of course, love the Roth IRA. But follow those steps, make sure you keep it separate from any personal funds you have or personal bank accounts or personal crypto accounts. Keep this IRA money separate in the IRA LLC. And just I would say, again, I think I said the beginning. Should you buy Krypto? I don’t know why you have such a hard question, in some ways it could be like next year we’re like, yeah, it’s back down to ten thousand or it’s a dollar per bitcoin. You know? Who knows? I mean, there’s some people saying, oh, it’s going to it’s going to 10x what it is and be worth four hundred thousand per bitcoin. I mean, nobody really knows. It’s kind of the perception of the people and what they want to put into this and trust it for so. So anyways, I just I’m just trying to say proceed with caution. We think it’s an interesting, cool topic. We want to get to the nuts and bolts on how to actually do it. You decide on whether to do it and how much.
Mark Kohler: Yeah, and one last thing, if I may my parting comment would be step for. Step four is well, actually, step four was when you put the money from the bank account into Coinbase, let’s put that step four up here, step four. So what I guess I want to talk about is step five. A lot of people say, OK, well, I made the money. Now how do I get it out? And there’s a few cautionary points here. You never want to take money from the Coinbase account to yourself personally or you don’t want to take the money from the LLC. You’re like, well, my LLC is nontaxable anyway. I’m just going to take the money whenever I want. No, you have to follow protocol. Remember that Coinbase account is not yours, that LLC is not yours, it’s your IRAs or whatever SDRP you used. So the money got to go back to the retirement account, then you take your distribution. So as you see in this diagram here, the final step, step five, is the payout, which could be at retirement or you may say, well, freak, I’ll pay the 10% penalty and some tax. I don’t care because this thing hit a home run. I need the money. Sooner you can do that, you can take a retirement account, money before your fifty nine and a half. You just have to look at the penalty, your tax consequences. So just step five is taking the money, but always go back the same way you came in Coinbase to LLC, LLC to retirement account and then back to you because you need to have the proper forms issued by the custodian or trust company to make sure the IRS knows what the heck happened. That’s how you launder money, right?
Mat Sorensen: Ok, yeah. That’s a new season of Ozark coming out, I believe to so you can learn more on the next season of Ozark on Netflix. So thanks everyone though for hanging in there on this topic. We think it’s interesting. Of course, it’s got a lot of news lately. And if you’re like, man, I didn’t even know about Self-directed IRA’s when I stumbled on this. Go back to Episode one where we talk about what is a Self-direct IRA, and we’ve sequentially added episodes in on where we think it’s best to learn. So you can go start going one, two, three and just kind of go through the podcast that way. If you like the show, please give it a like, share it, thumbs up, five stars, wherever, however you’re listening, whatever medium. Just say that Mark and I are pretty cool and we will feel great and.
Mark Kohler: Now you can say you’ve seen two-spotted white leopards.
Mat Sorensen: Yeah.
Mat Sorensen: At the same spot, they get more, you can get a merch, we’re gonna get a merch section up on our website. You can buy some much to spy on the white leopard.
Mark Kohler: Oh, and if any of you have questions, we do an open forum show about every three episodes, get over to DirectedIRA.com/Podcast. You’ll see it right there on the main website, a link to it, get to the podcast page and there’s a spot there. You can type in your questions and we’d love you to listen out for the regular open forum show. And we have a newsletter every week that’ll let you know when the upcoming Open Forum show as well. See everybody.
Mat Sorensen: Yeah, thanks.