Staking Cryptocurrency in Your Retirement Account including Solo 401k & Self-directed IRA LLC - My Community (2024)

While staking cryptocurrency may offer the potential for great returns for your retirement account, it is possible that those gains may be offset by taxes payable by your retirement account.

What is staking?

Per Coinbase: “Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain.”

How do I stake cryptocurrency in my retirement account?

If you qualify to open a Solo 401k (i.e. self-employed with no full-time w-2 employees), you can open a Solo 401k, fund it by (e.g. rolling over funds from an eligible retirement account and/or make 401k contributions), and then open an account for your Solo 401k at a cryptocurrency exchange that offers staking.

If you are not eligible to open a Solo 401k or if you wish to invest Roth IRA funds in crypto staking (since you cannot roll over Roth IRA funds to a Solo 401k), you can open a Self-directed IRA LLC to invest in crypto staking.

Wait! My Retirement Account may have to pay taxes? I thought it was tax-deferred?

To understand how income from staking cryptocurrency in your self-directed retirement account might be subject to tax, it is important to first understand the primary exception to the general rule that retirement account gains are tax-deferred.

While income earned in your retirement account is generally tax-deferred, one possible exception is business income earned in your retirement account which is generally subject to unrelated business income tax payable by your retirement account.

For example, consider a scenario where you invest your retirement account in a closely-held business. If your retirement account holds an ownership interest in an operating business providing goods or services that is taxed as a pass-through entity (i.e. the business is not taxed as a C-corporation but rather a partnership since S-corp stock cannot be held in a retirement account), the income attributable to such investment will be subject to unrelated business income tax payable by your retirement account. In the absence of this tax, the business income would never be taxed since the business income would not be taxed at the business level (since it is a pass-through partnership) nor at the partner level (since the ownership is held in a retirement account).

For the self-directed retirement investor consider investing retirement funds in crypto staking, the question then becomes whether staking crypto is considered ordinary business income:

• While there is no specific tax guidance on staking transactions, IRS Notice 2014-21 has stated that an activity similar to staking (cryptocurrency mining) may be considered income from a trade or business.
• Therefore, if you invest your IRA LLC/Solo 401k funds in staking cryptocurrency, the income generated may be subject to unrelated business income tax (UBIT) if the activity is considered an active trade or business.

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