Take-Away: Cryptocurrency can be purchased by an IRA, but it cannot be contributed to an IRA.

Background: Cryptocurrency is not government issued legal tender. Rather, cryptocurrency is an asset class other than money. The IRS treats cryptocurrency as property, and not currency, so that cryptocurrency has an income tax basis for purposes of measuring gain or loss on its sale or exchange. [IRC Notice 2014-21, Q&A-1.]  Specifically, the IRS has held that virtual currency is “a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.” [Revenue Ruling 2019-4.]

Cryptocurrency is Not Cash: Because cryptocurrency is not viewed as United States dollars that is an important distinction, since the Tax Code makes it clear that, other than an IRA rollover, contributions to an IRA must be in the form of cash. [IRC 408(a)(1).] While the Tax Code does not formally define cash,  it is treated by the IRS and courts a United States currency in the form of dollar bills, coins, or a check.

  • Since cryptocurrency is treated as property and thus cannot be classified as cash, it cannot be contributed to an IRA.

Cryptocurrency as an IRA Investment:  An IRA cannot hold collectibles. [IRC 408(m)(2).] If an IRA does acquire a collectible, it is treated as a taxable distribution. Collectibles are defined in the Tax Code  to include: (I) any work of art; (ii) any rug or antique; (iii) any metal or gem; (iv) any stamp or coin; (v) any alcoholic beverage; or (vi) any tangible personal property specified by the Secretary of Treasury for purposes of the subsection. Note that all of these prohibited investments by an IRA are of tangible personal property. Since cryptocurrency cannot be ‘touched,’ as it is traded solely in cyberspace, it is classified as intangible personal property, not tangible personal property.

  • Consequently, cryptocurrency is not a collectible, and an IRA is not barred from holding cryptocurrency as an asset.

Coins and Bullion: The Tax Code also provides an exception that permits an IRA to hold limited types of coins and bullion. [IRC 408(m)(3).] These coins and bullion exceptions apply only to certain gold coins, silver coins, platinum coins, coins issued by a State, and gold, silver, platinum, or palladium bullion. Cryptocurrency does not satisfy any of those descriptions. Accordingly, cryptocurrency is not a coin under IRC 408(m).

  • An IRA is not barred from holding cryptocurrency under the IRA ‘anti-coin’ rules, and it may be owned by an IRA.

Acquiring Cryptocurrency: The direct transfer of funds from one IRA custodian to another IRA custodian does not result in a payment or taxable distribution of funds. [IRC 408(d)(1).] Revenue Ruling 78-406 provides this conclusion regardless of whether the IRA custodian initiates the transfer or the IRA owner directs the transfer of the IRA assets. Therefore, the transfer from one IRA custodian to another IRA custodian, even if directed by the IRA owner, is not a rollover contribution to the recipient IRA for purposes of IRC 408(d)(3), i.e. it is not a taxable distribution because the funds are not within the direct control and use of the IRA owner.

  • The transfer of cryptocurrency from one IRA to another IRA by direct transfer will not cause a taxable IRA distribution of the cryptocurrency.

Observation: An IRA is intended to accumulate tax deferred wealth for an individual’s retirement years, ultimately taxed as ordinary income to the retiree. That is why some volatile asset classes are expressly prohibited investments for an IRA. The extreme volatility of cryptocurrency is evidence of its inability to be viewed as a ‘storehouse of value’ decades in the future when its owner retires.  Cryptocurrency is not government issued legal tender. Instead, it is an asset class other than money, which carries a high risk, not the type of asset normally associated with retirement savings. Moreover, if the retiree reaches his/her required beginning date (age 72) holding cryptocurrency in his/her IRA, it will be challenging to determine the retiree’s required minimum distribution (RMD) for the calendar year with the wild volatility associated with cryptocurrency.

Conclusion: Cryptocurrency cannot be contributed to an IRA, but it can be purchased and held in an IRA. Cryptocurrency that is purchased by an IRA  can be rolled over within 60 days of distribution to another IRA, including a Roth IRA in a Roth IRA conversion, but only so long as the type of cryptocurrency rolled over is the same type initially distributed. Similarly, cryptocurrency held by an IRA can be transferred by direct transfer from one IRA custodian  to another IRA custodian, again but only so long as that type of cryptocurrency rolled over is the same type as was initially held by the IRA. And cryptocurrency held by an IRA can be transferred by direct transfer to an IRA  that is established and maintained for the death designated beneficiary of an IRA, i.e. an inherited IRA, following the death of the IRA owner. In short, cryptocurrency is treated as any other asset held by an IRA. The practical question is whether cryptocurrency should be held as a viable investment asset in a retirement account?