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Prohibited Transactions...in Crypto?
Prohibited Transactions...in Crypto?

Is it possible to (accidentally) do a prohibited transaction with cryptocurrency in the Solo 401k?

Updated over a week ago

Before you begin, it's a good idea to familiarize yourself with the general concept of Prohibited Transactions so you can avoid them. Learn more here.

The following are some common prohibited transactions in crypto and a 401k you want to avoid.

Transferring non-retirement owned crypto holdings Into a Solo 401k

Perhaps you purchased Bitcoin or other crypto with non-retirement funds before you set up your Solo 401k. You cannot transfer, gift, or contribute those crypto assets (originally bought with non-retirement funds) to your Solo 401k.

There's no way around this. Even if you purchased the crypto from business earnings, it is not a contribution. Non-USD assets cannot be contributed to a retirement plan.

Using personal funds to buy crypto (and then try to put it in the 401k later)

You cannot use non-retirement funds to buy retirement assets. Any crypto you purchase with non-retirement funds (no matter what) cannot be transferred into the 401k at a later time. If you purchase the asset originally with non-retirement funds, those assets must remain outside of your retirement account.

Depositing 401k money into your personal crypto account because the exchange is taking forever to open the account for your Solo 401k

During a raging bull market, crypto exchanges have notoriously long wait times. It's reported some crypto exchanges may take months to open your institutional exchange account for your 401k trust. As frustrating as it may be to see the price move while your 401k funds are not in play, you cannot move 401k funds into your non-retirement owned crypto exchange account.

It doesn't matter if the non-retirement owned account has never been funded. It doesn't matter if there are no personal funds in the non-retirement owned account. The issue is account ownership. If the account is not owned by the 401k trust (and lists the 401k trust EIN), 401k funds cannot go into the account.

Storing crypto in the same account on a hardware wallet as non-retirement crypto

Storing your crypto in an offline cold storage wallet is a technically complex task. For most investors, we do not recommend this course of action. There are many ways things can go wrong, and you can lose your crypto holdings entirely.

However, if you feel comfortable holding/storing your own 24-word recovery phrase, PIN, password, and navigating the technical complexities of a hardware wallet, you still need to be aware of prohibited transactions with your crypto.

If you are using an offline hardware wallet, always create a separate/new sub-account specifically for 401k funds. Never put personal assets into this sub-account. Some clients may even purchase a brand new hardware wallet (with 401k funds) and then store 401k-owned crypto on that separate hardware wallet. Always talk with your tax professional first if you plan to go down this path.

Having your 401k buy or sell crypto to any disqualified person (e.g. parents, spouse, grandparents, kids, etc)

Crypto is an asset that follows the same prohibited transaction rules as any other investment. Never buy or sell crypto to/from any disqualified person. Your parents, grandparents, children, grandchildren, and spouse are all prohibited from transacting with your Solo 401k plan.

Investing in an NFT

NFTs are non-fungible tokens and are considered collectibles. Collectibles are a prohibited asset class by the IRS for retirement account investments. Therefore your Solo 401k cannot invest in an NFT.

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