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6 Common Pitfalls of Self-Directed and Checkbook Bitcoin IRAs

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Originally published on Unchained.com.

Unchained is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on services offered, custody products, and the relationship between Unchained and Bitcoin Magazine, please visit our website

You don’t often see the term “Roth IRA” trending online, but in 2021, tech investor Peter Thiel made headlines for his $5 billion tax-free Roth IRA piggy bank. How did he do it? The answer is alternative investments. He used a self-directed IRA to invest in early-stage tech companies multiple times over. Is it a loophole? Possibly. But it happened, it got attention, and the IRA structure in question could come under further scrutiny.

“Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.” – ProPublica (2021)

Let’s look at six common risks associated with self-directed and checkbook IRAs, how they may apply in the context of bitcoin, and why there may be increased regulation coming in the future. But first, we need to define our terms and differentiate between IRA structures.

The different IRA structures

The different IRA structures can behave in an “every square is a rectangle, but not all rectangles are squares” kind of way. IRAs can be Traditional (pre-tax) or Roth (post-tax) regardless of custodial relationship/structure. All IRAs are custodial. A custodian, in the context of IRAs, is a licensed financial institution overseeing and administering the IRA.

Brokerage and Bank IRAs

Brokerage and bank IRAs are the most familiar and common types. Brokerage and Bank IRAs allow investors to invest in stocks, bonds, ETFs, mutual funds, and other securities, as well as banking products (CDs, deposit accounts, etc.). Examples include your typical Fidelity, TD Ameritrade, or Charles Schwab IRA. The Unchained IRA is closest to this structure in this hierarchy.

Self-directed IRA (SDIRA)

A self-directed IRA is a custodial IRA where the custodian allows for expanded investment options outside of or in addition to typical brokerage and bank assets (stocks, bonds, CDs, etc.). Owners of self-directed IRAs can invest in non-traditional assets like real estate, businesses, private loans, tax liens, precious metals, and digital assets. Although the IRS doesn’t have a definitive list of allowed investments, it certainly has a few that are not allowed (collectibles, life insurance, certain derivatives, S-Corps, etc.).

Checkbook IRA

Checkbook IRAs are a subset of self-directed IRAs. The term “checkbook IRA” is not standard, but it usually refers to a self-directed IRA that gives an account owner control of investments through a checking account, usually through an LLC conduit. The account holder can then make investments with IRA funds simply by writing a check (“checkbook control”). With the added freedom of additional investment choices comes added responsibility of administration, as well as legal ambiguity as to whether the structure still qualifies as a tax-exempt IRA.

Non-checkbook self-directed IRA

A subset of self-directed IRA where the custodian approves transactions before investments are made. Investors must wait for the custodian to review each potential investment and formally accept title to the underlying asset. These were commonly used for real estate and private equity investments and began regaining popularity once additional legal uncertainties arose regarding checkbook IRAs in late 2021 (discussed in section 4 below).


Use code: “btcmag” for $100 off Unchained IRA + 1 year free of Bitcoin Magazine Pro market research. Click here to hold the keys to your retirement using Unchained’s collaborative custody financial services.

Risks to watch for when using a self-directed or checkbook IRA

1. Liquidity

Unfortunately, many self-directed assets lack liquidity, making them difficult to sell quickly. Examples include real estate, privately held businesses, precious metals, etc. If cash is ever needed for a distribution or internal expense, selling an asset fast could be a problem (which compounds into other problems, i.e., accidentally commingling funds). Self-directed IRA owners should conduct thorough due diligence on asset liquidity before committing to an investment strategy.

2. Formation and legal structure

When forming a checkbook IRA, a self-directed IRA LLC is established first. Then, the LLC establishes a checking account just like any other business entity. Next, the LLC is funded by sending the IRA funds to the checking account.

With the proper legal structure, the IRA owner can become the sole managing member of the LLC and have signing authority over the checking account. However, improper legal structure, registration, or titling could all cause serious problems for the tax-advantaged status of the IRA. Many checkbook IRA facilitators are competent, but errors could always lead to issues and possible disqualification/loss of the entire IRA.

3. Misreporting transactions

Within a checkbook IRA, owners can fund investments quickly and freely, but this comes with the responsibility of properly following rules and self-reporting transactions.

At the end of each year, the owner of the LLC will need to provide complete transaction details to its IRA custodian and submit fair market valuation (FMV) information. Without oversight into each transaction you make, a custodian is more likely to misreport income on your investments. Always ensure the custodian has accurate information to avoid accidentally breaking the law.

4. “Deemed distribution” treatment

Clients looking to buy precious metals, real estate, or digital assets should know the risk of “deemed distributions” treatment. A recent United States tax court case, McNulty v. Commissioner, illustrates the considerable risks of maintaining a checkbook IRA. In the McNulty case, a taxpayer used her checkbook IRA LLC to purchase gold from a precious metals dealer. She stored the LLC’s gold at home in her personal safe. The court ruled that her “unfettered control” over the LLC’s gold without third party supervision created a deemed taxable distribution from her IRA.

It is impossible to know how far a tax court will go applying “deemed distribution” treatment to any given transaction or investment within a checkbook IRA. For checkbook IRA owners that hold the keys to bitcoin in an unsupervised structure, there is a risk that the McNulty ruling could cause your entire IRA to be subject to tax. Further, since alternative investments were fairly recently (2015) added to IRS Publication 590, it’s entirely possible that the IRS and Congress could apply more scrutiny to checkbook IRAs going forward. Read more about the McNulty case and its implications.

5. Prohibited transactions

All self-directed IRA owners are always prohibited from commingling personal and IRA assets or using any personal funds to improve IRA assets. “Self-dealing” is one of the most common pitfalls for self-directed account holders. For example, if you use your IRA to purchase real estate, you are not allowed to use the property yourself—not even a little bit. You cannot live there, stay there, or rent office space to yourself there. You are not even allowed to make your own repairs or provide “sweat equity.”

It’s not only the IRA owner that can’t participate in any “self-dealing,” but spouses, children, and grandchildren as well. They are considered disqualified individuals, and penalties are stiff. These are stringent rules and can result in huge tax headaches if breached. I don’t intend to crush any dreams, but investing your 401k/IRA into your lakefront Airbnb vacation home and having you or your family stay there even once is a bad idea. No purchasing a rental home and renting it out to family members either. For further fun, see the IRS list of prohibited transactions here.

Here are a few examples of how prohibited transactions rules could be applied to digital asset investors:

Commingling personal wallets with IRA walletsLeverage without a non-recourse loanInvesting in certain collectible NFTs1

6. Financing

Financing within a self-directed IRA is also more complicated for several reasons:

Typically, a non-recourse loan and larger down payment are needed for any property purchases.Unexpected costs and fees can add up quickly and eat into any profits.IRA-owned active businesses could run into the issue of UBIT (Unrelated Business Income Tax). This also affects the overlap of bitcoin mining within an IRA.Any income and expenses must remain within the IRA structure and never commingled with personal funds. For example, when the water heater goes out (real estate) or salaries need to be paid (businesses), the IRA itself must pay for those services out of the IRA’s own cash. IRA owners could be tempted to co-mingle funds temporarily as they look for short-term liquidity to solve their cash needs.

What does this mean for bitcoin IRAs?

The self-directed IRA space has many potential risks if not properly managed. The IRS and Congress have been paying special attention to how these structures are used and abused. Combine this with their interest in regulating digital assets, and the landscape appears ripe for further scrutiny. With that, bitcoin IRAs need a unique approach that mitigates these pitfalls.

Unchained IRA is not a checkbook IRA

If you’re looking to hold actual bitcoin in your IRA account, you should consider the Unchained IRA. It’s not a “checkbook IRA” where transactions must be self-reported, and Unchained uses its key in the collaborative custody setup to track inflows and outflows of IRA vaults. That visibility mechanism allows the custodian to actively monitor the IRA and therefore allows users to remain compliant with current IRA rules and regulations.

There is no self-reporting required, and the non-checkbook structure helps mitigate the risk of potential pitfalls (McNulty, misreporting transactions, etc.). If bitcoin appreciates like many investors hope and expect, holding coins in an IRA structure properly is of the utmost importance.

This article is provided for educational purposes only, and cannot be relied upon as tax advice. Unchained makes no representations regarding the tax consequences of any structure described herein, and all such questions should be directed to an attorney or CPA of your choice. Jessy Gilger was an Unchained employee at the time this post was written, but he now works for Unchained’s affiliate company, Sound Advisory.

1While not technically part of the Prohibited Transaction Rules (section 4975 of the Internal Revenue Code), collectibles are separately prohibited from being held in an IRA under section 408(m).

Originally published on Unchained.com.

Unchained is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on services offered, custody products, and the relationship between Unchained and Bitcoin Magazine, please visit our website

​ Holding bitcoin in an IRA can be a great way to reduce your tax burden, but it’s important to understand common mistakes and how to avoid them when holding bitcoin for retirement. 

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Crypto News

El Salvador Is Still Bitcoin Country

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El Salvador is still Bitcoin country, despite the fact that bitcoin is no longer legal tender in the country — at least from where I’m sitting.

Let’s start with some background on the matter.

On January 29, 2025, the Legislative Assembly in El Salvador voted to remove bitcoin’s status as legal tender.

This means that businesses in the country no longer have to accept bitcoin (not that this rule was ever strictly enforced while bitcoin was classified as legal currency, as far as I know; however, I have been told that big businesses that operate in the country (e.g., McDonalds, Walmart) may stop accepting bitcoin as payment now, which could have a detrimental effect on adoption).

This change occurred approximately one month after the International Monetary Fund (IMF) struck a deal with authorities in El Salvador that stipulated the following:

  • El Salvador would receive a $1.4 billion loan to support the government’s “reform agenda”
  • Bitcoin-related risks be mitigated; bitcoin acceptance in the private sector must be voluntary, while the public sector’s participation in Bitcoin-related activities would be “confined” (bitcoin can no longer be used to settle government debts or pay taxes)
  • Operations for the government-created Bitcoin wallet, Chivo, would be “unwound”

While the news of the Salvadoran government’s reversing its policy on bitcoin as legal tender as a result of influence from the IMF feels like a gut punch even to me, someone who isn’t Salvadoran and doesn’t live in the country, I can’t help but believe that El Salvador is still Bitcoin country.

And this feeling has only grown stronger based on what I’ve seen Bitcoiners in El Salvador posting on X.

Evelyn Lemus, co-founder and Director of Education at Bitcoin Berlin, a Bitcoin circular economy within the country, doesn’t plan to stop teaching everyday Salvadorans about Bitcoin.

The team at Bit Driver don’t plan to change their business model — accepting bitcoin as taxi fare — any time soon.

While John Dennehy, founder of Mi Primer Bitcoin, expressed concern about the government of El Salvador’s rolling back its policy on bitcoin as legal currency, he and the ever-growing team at Mi Primer Bitcoin plan to double down on the work they’re doing.

The legendary Max and Stacy haven’t publicly voiced any plans to give up on El Salvador anytime soon.

And El Salvador’s Bitcoin Office, run by Stacy, is still stacking bitcoin and helping to run Bitcoin education programs in the country.

The lesson here is that while the law around Bitcoin may have changed in El Salvador, the Bitcoiners on the ground in the country have hardly flinched.

Because we are Bitcoin, what matters most is that everyday Salvadorans and everyone else involved in the Bitcoin movement in El Salvador continues to push forward with the Bitcoin mission.

The IMF may have landed a blow, but Bitcoiners in El Salvador remain steadfast in their efforts to foster broader Bitcoin adoption.

El Salvador is still Bitcoin country.

This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

 Bitcoin may no longer be legal tender in El Salvador, but Bitcoiners in the country haven’t given up on the mission. 

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Introducing the Bitcoin Everything Indicator

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Wouldn’t it be great if we had one all-encompassing metric to guide our Bitcoin investing decisions? That’s precisely what has been created, the Bitcoin Everything Indicator. Recently added to Bitcoin Magazine Pro, this indicator aims to consolidate multiple metrics into a single framework, making Bitcoin analysis and investment decision-making more streamlined.

For a more in-depth look into this topic, check out a recent YouTube video here: The Official Bitcoin EVERYTHING Indicator

Why We Need a Comprehensive Indicator

Investors and analysts typically rely on various metrics, such as on-chain data, technical analysis, and derivative charts. However, focusing too much on one aspect can lead to an incomplete understanding of Bitcoin’s price movements. The Bitcoin Everything Indicator attempts to solve this by integrating key components into one clear metric.

Figure 1: The new Bitcoin Everything Indicator.

View Live Chart 🔍

The Core Components of the Bitcoin Everything Indicator

Bitcoin’s price action is deeply influenced by global liquidity cycles, making macroeconomic conditions a fundamental pillar of this indicator. The correlation between Bitcoin and broader financial markets, especially in terms of Global M2 money supply, is clear. When liquidity expands, Bitcoin typically appreciates.

Figure 2: Global Liquidity cycles have had a major influence on BTC price action.

View Live Chart 🔍

Fundamental factors like Bitcoin’s halving cycles and miner strength play an essential role in its valuation. While halvings decrease new Bitcoin supply, their impact on price appreciation has diminished as over 94% of Bitcoin’s total supply is already in circulation. However, miner profitability remains crucial. The Puell Multiple, which measures miner revenue relative to historical averages, provides insights into market cycles. Historically, when miner profitability is strong, Bitcoin tends to be in a favorable position.

Figure 3: BTC miner profitability has been an accurate gauge of network health.

View Live Chart 🔍

On-chain indicators help assess Bitcoin’s supply and demand dynamics. The MVRV Z-Score, for example, compares Bitcoin’s market cap to its realized cap (average purchase price of all coins). This metric identifies accumulation and distribution zones, highlighting when Bitcoin is overvalued or undervalued.

Figure 4: The MVRV Z-Score has historically been one of the most accurate cycle metrics.

View Live Chart 🔍

Another critical on-chain metric is the Spent Output Profit Ratio (SOPR), which examines the profitability of coins being spent. When Bitcoin holders realize massive profits, it often signals a market peak, whereas high losses indicate a market bottom.

Figure 5: SOPR gives insight into real-time realized investor profits and losses.

View Live Chart 🔍

The Bitcoin Crosby Ratio is a technical metric that assesses Bitcoin’s overextended or discounted conditions purely based on price action. This ensures that market sentiment and momentum are also accounted for in the Bitcoin Everything Indicator.

Figure 6: The Crosby Ratio has technically identified peaks and bottoms for BTC.

View Live Chart 🔍

Network usage can offer vital clues about Bitcoin’s strength. The Active Address Sentiment Indicator measures the percentage change in active addresses over 28 days. A rise in active addresses generally confirms a bullish trend, while stagnation or decline may signal price weakness.

Figure 7: AASI monitors underlying network utilization.

View Live Chart 🔍

How the Bitcoin Everything Indicator Works

By blending these various metrics, the Bitcoin Everything Indicator ensures that no single factor is given undue weight. Unlike models that rely too heavily on specific signals, such as the MVRV Z-Score or the Pi Cycle Top, this indicator distributes influence equally across multiple categories. This prevents overfitting and allows the model to adapt to changing market conditions.

Figure 8: The most influential factors impacting the price of bitcoin.

Historical Performance vs. Buy-and-Hold Strategy

One of the most striking findings is that the Bitcoin Everything Indicator has outperformed a simple buy-and-hold strategy since Bitcoin was valued at under $6. Using a strategy of accumulating Bitcoin during oversold conditions and gradually selling in overbought zones, investors using this model would have significantly increased their portfolio’s performance with lower drawdowns.

Figure 9: Investing using this metric has outperformed buy & hold since 2011.

For instance, this model maintains a 20% drawdown compared to the 60-90% declines typically seen in Bitcoin’s history. This suggests that a well-balanced, data-driven approach can help investors make more informed decisions with reduced downside risk.

Conclusion

The Bitcoin Everything Indicator simplifies investing by merging the most critical aspects influencing Bitcoin’s price action into a single metric. It has historically outperformed buy-and-hold strategies while mitigating risk, making it a valuable tool for both retail and institutional investors.

For more detailed Bitcoin analysis and to access advanced features like live charts, personalized indicator alerts, and in-depth industry reports, check out Bitcoin Magazine Pro.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always do your own research before making any investment decisions.

 A Single Metric to Rule Them All – The Bitcoin Everything Indicator combines multiple key metrics into one comprehensive tool for better investment decisions. 

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Crypto News

Here’s The Secret To Investing In Bitcoin

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Follow Frank on X.

Over the course of the last week, we’ve seen reports of massive bitcoin liquidations.

For those unfamiliar with the term “liquidation” as it applies to finance, it refers to when a trader is forced to close a leveraged trade because the margin for the trade has been depleted.

In everyday pleb terms, it’s when someone borrows money to bet on the direction of the price of bitcoin and they get it wrong, resulting in their losing the money they put up for the trade (or more, in some cases).

When it comes to trading bitcoin with leverage, I keep in mind the first line from the post below:

So, lesson number one in investing in bitcoin is don’t do so with leverage. (Not financial advice.)

Even now that bitcoin has about a $2 trillion market cap, it’s still a highly volatile asset. Its price fluctuates notably in response to news. Because of this, it’s much safer to just buy some bitcoin on the spot market and hold it for the long run (at least four years).

What is more, when and if you choose to buy some bitcoin in the spot market, consider remaining underexposed to bitcoin instead of overexposed to it (those terms are subjective; interpret them as you will).

When you’re overexposed to bitcoin, or if you’re new to the market and you’ve gone all in on bitcoin, it’s more likely that you’ll panic sell if its price tanks in the short term.

How will you know if you’re overexposed? You’ll likely begin losing sleep over it and/or being investing emotional energy in hoping that bitcoin’s price moves in a certain direction (up only).

I share this based on experience. I was overexposed to bitcoin in 2021-2022, and I often felt sick because of it. Once I lessened my exposure, I felt better and was able to think more clearly.

Find an investment threshold with which you’re comfortable, and, again, plan to hold for the long haul.

Aiming to get rich quick with bitcoin is nearly a sure fire recipe for getting yourself rekt.

Take it slow, and heed the very wise advice of legendary Bitcoiner Matt Odell: stay humble, stack sats.

(The inverse of such sage advice would be: be irrational, bet on bitcoin irresponsibly.)

Be careful out there.

This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

 Don’t use leverage, and don’t overexpose yourself to it. 

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