Mining inside a Roth IRA.
The structure is real and people do use it. The version of it you usually read leaves out the tax that applies to an operating business held inside a retirement account, and that tax is the whole question.
3 min readThe idea, stated fairly.
A self-directed Roth IRA can hold assets beyond listed securities, including an interest in an LLC that owns equipment. Contributions go in after tax, and qualified distributions in retirement come out without further tax on the growth in between.
Point that at mining hardware and the appeal is obvious. Rewards accumulate inside the account, appreciation happens inside the account, and a qualified distribution years later is not a taxable event. That is the pitch, and the underlying mechanics of a self-directed IRA are genuinely as described.
The problem is not the account. It is what happens when the thing inside the account is an operating business rather than an investment.
Unrelated business income tax is not a detail.
Tax exempt accounts are not exempt on income from an unrelated trade or business they carry on regularly. That income is unrelated business taxable income, and the account itself pays tax on it.
Mining is the awkward case precisely because it looks like an active trade or business rather than passive investment return. Where that characterisation holds, the mining income is exposed to UBIT inside the account, and the trust rate schedule that applies reaches its top rate at a very low level of income. The shelter you were buying is substantially reduced at exactly the point the operation starts working.
If borrowed money is used to acquire or carry the asset, unrelated debt financed income can bring a further portion into charge on top. Financing a fleet inside an IRA is not the neat move it appears to be.
The usual answer, and what it costs.
The common structuring response is to interpose a corporation so the account holds shares rather than an operating interest. Dividends and gains on shares are generally not unrelated business taxable income, so the UBIT exposure at the account level falls away.
It falls away because the tax has moved rather than disappeared. The corporation pays corporate income tax on its profits before anything reaches the account. You have swapped a compressed trust rate for a flat corporate one, which may well be the better answer, but it is a trade rather than a solution and it should be presented as one.
Four ways this goes wrong.
Prohibited transactions
The rules on dealings between a plan and a disqualified person are strict and they have no materiality threshold. You are a disqualified person in relation to your own IRA, and so are certain family members and entities you control.
Providing services yourself
Working on equipment your IRA owns, or personally guaranteeing anything connected to it, is the most common way people walk into the previous point without realising it.
The consequence is not a penalty
A prohibited transaction can disqualify the account, which is treated as a distribution of the whole balance. The tax and any early distribution penalty land in that year, on everything, not on the offending amount.
Custody and valuation
A self-directed custodian is required, annual valuation of a non traded asset has to come from somewhere defensible, and the reporting obligations continue for as long as the account holds it.
Where I stand on this one.
I do not set these structures up, I do not act as a custodian, and I am not going to advise you to put mining hardware inside a retirement account. If you want to explore it, the people to speak to are a tax adviser and an ERISA specialist who do this work regularly, before any money moves.
I have kept this page up because the structure gets written about enthusiastically and the UBIT point is usually missing from those descriptions. Knowing the objection is worth more to you than another article describing the upside. For most owners looking at mining, holding the hardware in a business they already run is the simpler question and the one worth answering first.
Start with the simpler question.
Thirty minutes on your capital, your timeline and your entity. If a retirement account structure is genuinely where this should sit, I will say so and point you elsewhere. You can also read what is deductible and what can go wrong.
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