New IRA product allows for tax-free Bitcoin mining

Bitcoin miners just secured a windfall on tax savings.

IRA provider Choice and Bitcoin mining and hosting firm Compass Mining announced that they’re offering an IRA that will allow miners to produce the cryptocurrency in a tax advantaged account.

The two companies are teaming up to allow clients to buy Bitcoin mining machines through an IRA.

The benefit of mining through an IRA is that any coins minted would be exempt from income taxes and also benefit from tax-free appreciation that other assets like stocks and real estate have traditionally enjoyed through the popular retirement account’s structure.

“We’re always looking to find solutions for customers who are trying to save more of their hard-earned money and plan for their future,” said Ryan Radloff, chief executive officer of Choice, an offering of Kingdom Trust Company, in a statement announcing the offering. “Being able to purchase a Compass miner within your IRA and mine Bitcoin in a tax-advantaged account is an incredible opportunity.”

Paying income taxes on mined Bitcoin has long been an impediment for those looking to get into the space. Think of it like this: When a new car comes off an assembly line, a manufacturer isn’t subject to income tax. That doesn’t happen until the automobile is sold. But for Bitcoin miners, income tax is incurred when the digital currency comes into their possession. If, to pay that levy, they choose to sell a portion of their mining rewards, a second taxable event — this time in the form of capital gains on any appreciation in value — is triggered.

“When you successfully mine virtual currency, you trigger a taxable event and must report the fair market value of the mined coins at the time of receipt as gross income,” wrote Justin Woodward, co-founder of cryptocurrency tax and accounting software company TaxBit in a June 3 blog. “Selling mined cryptocurrency creates a second taxable event. When you dispose of cryptocurrency, such as through selling, you will incur either a capital gain or loss.”

Kingdom Trust’s Choice platform has grown to power more than 125,000 retirement accounts since its launch in 2020, with assets under custody of over $18 billion spread across 20,000 assets.

For miners setting up an account, machinery must be purchased with funds in an IRA and previously owned mining rigs can’t be retroactively moved into the tax advantaged structure.

Purchasing a single new mining unit can cost about $10,000, according to Compass’s website. On top of that, you’ll have to pay for ongoing electricity usage and hosting, plus a one-time setup fee of $500, plus an annual fee of $150, Radloff said in a phone call with Bloomberg.

“You’re generating Bitcoin returns every week and before you might have to sell that Bitcoin to cover your tax bill and other costs,” said Radloff. “Now you can cover your costs with the tax-efficient Bitcoin generated from your IRA. It creates a circular Bitcoin economy.”