Massive profits from cryptocurrency trading creates a problem many coin investors might not realize: How to avoid losing a huge chunk of your windfall to taxes, penalties and fines.
In the worst-case scenario, you could be in legal trouble for not reporting gains or fall victim to an IRS audit. There have been numerous stories of people turning their cryptocurrencies into fiat only to have an IRS agent alerted by a bank employee by telephone the same day.
In fact, any bank deposit over $10,000 can trigger an IRS inquiry and possibly an investigation by the Securities and Exchange Commission (SEC) too. These rules exist to nail down money launderers, but they can trip up honest crypto investors just as easily.
Luckily, there is a solution. Anyone interested in wealth creation using cryptocurrencies should consider creating a limited liability company (LLC).
Once you have an LLC, it’s fairly easy to then set up a self-directed IRA retirement account.
Self-directed IRAs lets you invest not only in traditional investments such as stocks and bonds but also real estate (including commercial properties), precious metals such as gold and silver, IPOs, debt, other business, even initial coin offerings (ICOs).
Besides greatly expanding the scope of your investments, the IRA structure also allows you to invest in areas that you have specialized knowledge or insight into instead of using cookie cutter portfolios marketed by banks and retirement specialists.
In general, a self-directed IRA allows you to invest up to $5,500 if you’re under 50 years of age and $6,500 if your over 50 years of age.
I’ll give you three examples to illustrate the point of how a self directed IRA can benefit you. First, a self directed IRA allows you to purchase other people’s debts including second mortgages, non-performing first mortgages, even cash flows on household appliances.
The second example is you invest in a private equity offering from a business and are paid dividends or profits from a sale or IPO. Those deals tend to be strikeouts or home runs and, again, if you hit a homer with a self-directed IRA your profits continue to grow year after year.
The famous case of this happening is Mitt Romney, the presidential candidate and former Massachusetts governor. He put shares of his private equity company, Bain Capital, into an IRA during the years he worked there.
Later, the shares grew to be valued at between $20 million and $102 million, all shielded from taxation by his IRA.
The final example is an investor who bought between $1,000 and$10,000 of Bitcoin or Ether and saw their investment grow a hundred or thousand fold without considering the immediate tax implications.
A self-directed IRA would allow that person to take their profits from crypto, invest it in more crypto or diversity into other investments and continue to grow their money without making tax payments until retirement.
IRAs are not allowed for all investments. Please consult a tax professional and make sure you are in compliance with all government regulations, and of course be smart about your investment risks.