Penalities for a prohibited transaction can be severe. The IRS can distribute your entire IRA for taxation or fine your Solo 401(k) 15% of its value.
Can I read about general prohibited transactions in an IRA?
What are some examples of prohibited transactions related to cryptocurrency?
If the IRS sees fit, remember that a prohibited transaction could mean the distribution of your IRA. This means you could lose all your tax benefits for the ENTIRE IRA (not just what was invested in cryptocurrency) plus early withdrawal penalties if you are before 59 and 1/2. Solo 401(k)s can have a 15% penalty.
- flowing your new IRA LLC dollars into an existing centralized exchange personal account; where you then purchased new cryptocurrency coins that were stored on behalf of the existing personal (non-retirement) account. This would ‘co-mingle’ the personal, taxable assets, and the tax-advantaged retirement, which is impermissible. It is imperative that any provider you work with correctly title the assets in the name of the IRA LLC or your Solo 401(k) Trust.
- Contributing Crypto directly into a retirement account as an IRS deductible contribution. This crypto is personal property and must be sold, all IRS contributions must be made in fiat, and then you can purchase cryptocurrency. There is no current tax-compliant mechanism to get cryptocurrency straight into an IRA. All contributions you make to the IRS must be properly categorized so that you could back them up during an audit.
- Using personal wallets or storage devices to store, move, or transact retirement crypto. All devices must be purchased with the IRA.
- Storing a cold storage device at home. You can read more here.
- Staking cryptocurrency AND receiving margin for it. An IRA can have NO extensions of credit under any circumstances.
- Getting a loan to your IRA and it not being non-recourse. ALL loans to an IRA must be non-recourse according to IRAs rules. Getting a loan to an IRA could mean UBIT taxes.
- Investing cryptocurrency or directly into a company you own over 50% of.
- A transaction with your children, grandparents, or yourself with crypto and your IRA.
- Taking out cryptocurrency out of your IRA and using it outside of your IRA on personal costs, expenses, or trades.
- Any transaction the IRS could prove "was not at arms length" and violated one of the prohibited transaction rules.
- Investing in an NFT, which is a collectible. The IRS does not allow collectibles in a retirement account.