Jeff Vandrew of Unchained Capital joins me on the show to share his thoughts on Bitcoin for the very long term. Where is it going, and how should you think about using the retirement system to potentially stack more sats? 
We chat: 

• Where is Bitcoin going over the long term?
• What happens if more states make Bitcoin legal tender? 
• How big is the market for retirement savings
• What about just stacking sats outside retirement accounts? 
• Roth vs Traditional IRAs
• McNulty case and whether it stops self custody
• Future trends with retirement savings

Links:

• Jeff Vandrew Twitter
• Unchained McNulty Webinar
• Unchained Site

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Braiins.com
• Unchained Capital (code LIVERA)
• CoinKite.com(code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera

Podcast Transcript:

Stephan Livera:

Jeff, welcome to the show.

Jeff Vandrew:

Thanks a lot, man. It’s great to be here.

Stephan Livera:

So Jeff, I’m a fan of what you’re doing and obviously I know you’re over at Unchained [Capital] and you’ve been a real pioneer in the space and wanted to get you on and get your thoughts about Bitcoin for the very long term, as I’m sure you’re used to thinking about and dealing with for customers and just for people you’re working with in the space. So yeah, maybe let’s just start with a little bit about you. I think probably my listeners will know you, but maybe just give a brief background for those who don’t.

Jeff Vandrew:

Yeah, sure. So I’m Jeff Vandrew. I’m an attorney, a certified public accountant, and also a certified financial planner. I was in private practice on my own for a long time. Most people in Bitcoin know me based on my prior work setting up Bitcoin IRAs. So as a private practice lawyer, I developed a product which we called back at that time a KeyKeeper IRA, which is a legal structure that would allow you to hold Bitcoin in your IRA, but still allow you to have control over your private keys. So I’ve been in practice forever—I’m an old guy even pre-Bitcoin—but I started the KeyKeeper IRA stuff in 2014. And I did that for years. And then in 2021, Unchained Capital essentially acquired that product from me, and then I joined Unchained Capital as the head of the retirement and inheritance division.

Stephan Livera:

Excellent. And so as we are thinking about Bitcoin for the very long term today, it’s probably useful to think about where we’re going. So maybe just as a bit of an open question for you, Jeff, where do you see Bitcoin is going? What’s your long-term macro view here?

Jeff Vandrew:

Yeah, so I look at this in—I don’t want to sound egotistical—but in a unique way. And when I say unique, it’s because I look at it I think in more of a caveman way than most people do that are probably guests on your show. Like everybody else, I look at the price—it’s just like a natural thing that we all do. But when I look at the price, I don’t do any sort of mathematical models or anything like that. One of the things I’m interested in is charting, but not in the sense, again, of complex math models. More in like the Charles Dow, old-school sense where you just take a look at it and you get like a vibe or a feel for general sentiment—things like that. And when I say that, I should be clear that I don’t use that to trade, because as we all know, most of Bitcoin gains over a long period come in over the course of some tiny amount of days, like 8 days. So if you’re trying to trade the market, you’re going to end up shooting yourself in the foot 100% of the time. I look at it more as an idea of where we are in adoption. And the way that I do that is: when the Bitcoin price is going up, I don’t consider every price increase to be equal to every other price increase. Specifically, I try to look at the sentiment that I feel is driving a specific run-up in price over a 1-week, 2-week month, period, whatever the case might be. And I tend to look at that by looking at other market sentiments and comparing them to that Bitcoin price and see if that’s what’s tying in. So to give you a more concrete example, I tend to look at the larger stock market—do you know what a Matryoshka doll is?

Stephan Livera:

No. Oh, I might have heard of it, but I don’t know. Could you explain?

Jeff Vandrew:

So a Matryoshka doll is sometimes called a Russian nesting doll or a babushka doll. It’s the little Russian dolls where you open up the big one and there’s a little one and there’s a smaller one in the middle and a smaller one in the middle. So my theory on our general stock market is that most of it’s fake. We’re in a fiat world, but you can gain valuable information sometimes from looking at it. And my metaphor there is the nesting doll, especially right now where we’re coming out of 2 years of this pandemic economy that was characterized by extremely easy money that was inflating prices. Plus, with regard to a lot of tech stuff in general, we had a rise in prices based on the fact that a lot of people took this to mean like, Oh, people are going to never be leaving their houses forever. So there were certain stocks like Zoom—I’m not speaking about Zoom specifically, but only as a stock that really shot up in price—because people thought this sort of video conferencing was going to be here to stay, even as the pandemic wound down. So right now I look at the market as: the little doll in the middle is the stuff that I consider total junk—things that shot up in price in this pandemic economy that I have no faith in whatsoever. So what’s neat about that is we have almost an index now that you can track that I call a junk index, and that’s basically the ARK Invest ETF, for people that are familiar with that. It’s not a perfect proxy to an index because it’s actively managed, and I honestly think sometimes she tries to catch some dead cat bounces and stuff like that, but that’s one sort of proxy. Or you can look at specific companies—a good example is Roblox. I don’t even understand what they do. And on the day we’re recording this, the stock crashed 30% yesterday—in a day—and they IPO’ed not that long ago. So that’s the kind of stuff that I look at as being in the middle [of the Matryoshka doll] as being total garbage. And by the way, just for ethics reasons, when you’re talking your own book, you should say this: if I say anything about a specific company, an ETF, whatever, just assume that I’m shorting it if I say that I don’t believe in it. And assume I have a long position if I say I do, but I don’t think I’ll be giving any encouragement to take long positions during this podcast. So you’ve got that in the middle, and then the next doll out, which encapsulates that but also includes other stuff, is tech industry stuff that is better than that, but not still long-term. It’s not for instance Microsoft—whatever you think of Microsoft—but it’s not Microsoft, it’s not Google, or anything like that. You can think of a proxy for that stuff is like being the, the FANG+ index, which is about 15 companies. They’re certainly more solid than the little doll in the middle, but there’s more junk in there, and it’s more overinflated because of this pandemic economy. And then the next doll out you could think of as something like say the NASDAQ-100, which is still very tech-heavy, it’s still got more of that garbage in it, but there is more of the “real economy” in there. Next doll out would be something like the S&P 500. Or if you could use a total market index like the VTI—they tend to move hand-in-hand, since the S&P 500 is such a large part of something like the VTI. So the reason I bring this all up is: when the Bitcoin price goes up, if the price is going up, and the sentiment to me looks like the same sentiments that are driving price increases in one of those little dolls, to me that’s not a valuable price increase. I don’t think that anything in there is related to adoption, it’s just that people are buying anything they can find, and a lot of the people that are buying in during those periods are probably people that do not have a very long time preference. They’re probably a lot of the same people that are buying Roblox or driving up Peloton prices to ridiculous levels. So this most recent price increase that we’ve seen over the past month, my take on that has been like, Eh, I don’t think this is really a signal of much of anything, because it was tied to a lot of those sentiments that we’ve seen over the past 3-4 weeks, for instance. Whereas if I see a situation where say the FANG+ index is down or even the NASDAQ-100 is down, and Bitcoin, even if it’s not increasing, if it’s holding steady, if it’s not falling along with that, if we’re seeing over the course of whatever the time period might be, the FANG+ is down 5%, ARK is down more than that, and the NASDAQ-100 is down a few percent as well, and Bitcoin is hanging in there or it’s increasing—that is something that I view as a more positive indicator for Bitcoin’s long-term future than I would a 10% Bitcoin price increase that seems to be driven by the same sentiments that are driving a price increase in what I would consider garbage. That’s a very long explanation, and it’s kind of a caveman-level explanation, because I’m not giving you hard math behind it or anything, but that’s the way I tend to look at things. And again, I don’t use this for trading or anything like that. I don’t hold Bitcoin for the short-term. But I still find it interesting. I feel that it gives me a picture as to where we are in terms of, is Bitcoin really becoming—first of all, before we even talk about becoming a global reserve currency—to me, it’s got to become a hedge against inflation first. So even just to get to that first like, It’s a solid hedge against inflation, as opposed to something that runs up in price during speculative financial manias.

Stephan Livera:

So in other words, you could think of it like, if it’s decorrelated and bullish or at least neutral, that’s a good thing in your view from a Bitcoin point of view, because you think that we would say that’s more genuine adoption of Bitcoin, right?

Jeff Vandrew:

Right. That’s an accurate way to phrase it. And I don’t even look at correlation on the mathematical level, I look at it even more woo-woo than that, in terms of trying to get a feel for the way people feel when they’re purchasing. Like, what are their motivations? What’s the driver? That’s what I’m looking at for that stuff. So the real old-school type of technical analysis. The way people did technical analysis in like 1920, not the way they do it in 2022.

Stephan Livera:

The TA traditionalist Jeff. In some ways we are naturally momentum chasers, like humans are momentum chasing. So we see it going up, we’re like, Yeah, yeah—try and buy more now. So maybe that’s a little bit of what you’re tapping into there. So if we project out over the longer term, what kind of changes do you think we can see, laws and regulations-wise? Do you think the government, as an example, will have to change tax laws in a Bitcoin world?

Jeff Vandrew:

Well, it depends on what level of adoption you’re asking about. Are we talking about where Bitcoin’s actually being used as money and everyday transactions, or are we talking more where Bitcoin is just, say, has fully replaced gold as people’s primary inflation hedge?

Stephan Livera:

Yeah I’m curious, actually. What would you say at the replacement of gold? And then what would you say at the global money level?

Jeff Vandrew:

So at replacement of gold, I think arguably we’re already there. I don’t know. We’ll see. We’re going to learn a lot more over the past few years. I don’t think much is going to change in that regard, because Bitcoin isn’t taxed much differently than gold. And for everybody that’s listening outside the US, I’m speaking only with respect to the United States. Bitcoin isn’t taxed radically differently than gold. Both are treated as property under the tax code. Both are subject to capital gains and loss rules. Gold actually, interestingly, has less favorable capital gains rates than any other asset does, because it’s considered a collectible. For strange historical reasons, it’s considered a collectible under the code, and collectibles get special capital gains rates, but ones that are not as favorable to everything else. I don’t think there’s a reasonable argument that Bitcoin could be categorized as a collectible, so I don’t think we’d have an issue with that. The change really comes in the event that Bitcoin starts being used for day-to-day transactions. So for right now, just for people that aren’t aware, the reason that Bitcoin is classified as property rather than currency under the tax code is not statutory. The IRS basically just issued what’s called a notice, which is one of the lowest levels of guidance, that says, Hey, this is our position on what Bitcoin is, and this is the position we’re going to take in enforcing the tax code. Now by following that, you’re in a good spot, because you end up in a spot where you’re taking the same position as the IRS, therefore the IRS is unlikely to go after you if you follow its position. But it doesn’t have the same force that an actual passed law, say that went through Congress, has. Meaning: you can take a contrary position. If you do and you’re audited, the IRS can make an assessment for additional tax against you, and then you would have to go to tax court to fight that out with the IRS, which you certainly have the right to do in the United States. We have an entire court system that’s there for you to pursue that avenue. Most people realistically don’t want to do that—that takes time, you have to hire lawyers, it’s like a whole thing. It costs you a lot of money. And I should say that the IRS notice is not unreasonable based on the way that Bitcoin is used today, or even the way that it would be used at that gold replacement role—that probably is the correct interpretation of how Bitcoin should be taxed under the internal revenue code as it’s written today. If the way Bitcoin is being used on a day-to-day basis changes and people are using it more frequently as currency, then that notice starts to become not a reasonable interpretation. So one of two things happens: (1) the IRS can issue a new notice, or it can even go to what’s called a higher level of authority and they can issue what’s called a treasury regulation. A treasury regulation carries more weight, it carries more authority. If you challenge it in tax court, a treasury regulation is entitled to a higher level of deference. It’s actually at law called Chevron deference. Chevron was a case a very long time ago about administrative regulations and the level of deference they’re entitled to. So that would carry Chevron deference. So either by a notice, a revenue ruling—which would be slightly lower than regulation but higher than a notice—however they do it, the IRS could change its position. So that would be one thing. Or (2), the IRS drags its feet on changing its position, and then someone actually decides to challenge it in tax court and then they win or lose. So assuming they win, that would be another way that the categorization of Bitcoin moving from property to currency could potentially happen. Hopefully that’s not the way that it happens, because that’s an ugly way to do it in that it takes a lot of time, it creates a lot of uncertainty while those legal cases are pending. If the ruling happens in a specific circuit—so the US Federal Courts are broken into circuits for appeals. If it happens in a specific circuit, legally speaking, that ruling is only binding on taxpayers that live in that circuit. So Bitcoin could end up being treated differently for tax purposes in Florida as opposed to New York. That could happen. Now, realistically, most of the time, if the IRS loses at the circuit level, they’ll formally acquiesce to the ruling. Meaning: they just say that they’ll follow it nationwide. But they’re not required to do so, and sometimes they don’t. There have been historical examples of them not acquiescing to a ruling like that, and then you can end up in a situation where the federal tax code is not administered equally throughout the United States, potentially. So those are all reasons why hopefully when that change occurs, it will come from the IRS-level rather than through the court system. If it becomes currency, all the gain and loss rules change, it would become treated like if you were buying and selling sterling in the United States or something like that, or euros or whatever, would be changed. From an IRA perspective, which is what I work in, it wouldn’t matter. Both currency and property, broadly speaking—assuming that they’re not otherwise specifically prohibited somewhere in the tax code—are acceptable investments for IRAs. The only way that it could become not permissible as an investment within an IRA would be a situation where it would require an actual act of Congress, is the short story.

Stephan Livera:

And while we’re here, we are starting to see different ideas around legal tender. So we’ve seen, as I’m sure you’ve seen, there was an Arizona legislator who did a Bitcoin legal tender bill. And Don Huffines, who’s a candidate for Texas, is proposing that and saying, I want to make Bitcoin legal tender. Do you have any insight you could share with us on what that would mean for Americans in those states? Would that mean they have a lot less of a capital gains tax to worry about? Or will that really depend?

Jeff Vandrew:

It would probably be mostly symbolic. And I don’t oppose those efforts—I think they’re great. The major difference that that makes is that the state government in that state, and likely also the municipal governments that sit under that state government, would be required to accept Bitcoin in payments for taxes. So payroll tax, sales tax. If you’re in a state that has state income tax, they would have to accept it. In theory, if enough states started making it legal tender, then we get into that subjective determination of whether at the federal level it can be properly classified as property versus currency. So it does have an effect of being a factor in that subjective sliding scale between property and currency. But beyond that it wouldn’t affect it, per se. It’s not like if I live in Arizona and Arizona makes Bitcoin legal tender at the state level, that doesn’t change the federal taxation of Bitcoin on its own, as an independent factor.

Stephan Livera:

Understood. And so that’s going to be a longer term discussion. And I think over time, maybe it eventually does get there if it does happen at a federal level. Or if some states were to soft-secede over time, maybe they might start to try to have their own views on how Bitcoin should be taxed or regulated, et cetera.

Jeff Vandrew:

Yeah, and states can do that. States absolutely can change the way that Bitcoin is taxed at the level of state income tax, if you’re in a state that has income tax. So for instance, Texas was one of the states you mentioned—they don’t have income tax to begin with, so it wouldn’t matter. But Arizona does. I haven’t read the bill, but as part of that legal tender bill, they absolutely could change the way that Bitcoin is taxed at the state level.

Stephan Livera:

Yeah. Also, when it comes to Bitcoin and holding our keys and talking about this adoption—and as we were saying, we were talking firstly about this idea of replacing gold and then someday becoming global money—along that journey, do you see ETFs playing an important role? Are they good or bad for Bitcoin? Is it better for the coins to be held in self-custody as opposed to ETFs, or is the trade-off more like, Well, you’re going to access more people who can put their money into Bitcoin. How are you seeing that?

Jeff Vandrew:

Well for anybody out there that’s listening that’s considering holding Bitcoin in an IRA or retirement account, probably two of their big choices are going to be, Do I just buy a Bitcoin ETF within my regular brokerage IRA account?—it’s very, very easy to do, or do I come to a product like Unchained where I can hold real Bitcoin in my IRA and actually have control over this. So the factor there at the individual level—and then I’ll move to more of a systemic thing—at the individual level, it’s like anything else: the difference between holding your coins in your Coinbase account versus holding your own keys in general. Same analysis of Not Your Keys, Not Your Bitcoin applies. And beyond the ETF, there are other custodial Bitcoin—well all IRAs are on a legal basis custodial—but I should say [there are other] Bitcoin IRA products which don’t allow you to have any control over your keys. And I would point out that one of them recently just had its Gemini account hacked. We don’t have all the details yet, but it appears there were very significant losses of customer Bitcoin. It was not just some Bitcoin that the company itself had in reserves. So that’s always going to be a risk, and it remains to be seen whether they’ll be able to be made whole, because obviously there is no FDIC insurance on Bitcoin, there’s no SIPC insurance on Bitcoin when it’s held in that manner. Now the ETF is a little bit different than that. The current ETF we have in the states is not even a physical Bitcoin ETF. It’s an ETF based in Bitcoin futures. So there aren’t necessarily those risks in terms of a hack, but still you’re participating in the legacy financial system. You’re dealing with a futures market, which is not necessarily going to track the actual price of Bitcoin all the time. It seeks to be as close as possible, but that’s not 100%. And at a more at a more systemic level, whether or not the ETF is good for Bitcoin, I don’t have a particular opposition to it. There are people that that’s going to be their initial exposure to Bitcoin. They’re just learning about it, they may not be true believers yet in the long-term future of Bitcoin, but they view it as something on a shorter timeframe than you or I do that could be positive in their portfolio. Well, that’s not the end of the world, because oftentimes those people buy in, and the longer they hold something like that, the more that they learn. And the more that they learn, the more they realize how powerful Bitcoin is as more than just a hedge during times of higher inflation. That is not an uncommon thing. Both before I came to Unchained I saw this, and now our Unchained team sees this when they’re out talking to clients about IRAs. A lot of people that are coming over to our product that are rolling over are coming from GBTC or the ETF. A lot of GBTC, because the ETF is fairly new. GBTC was the only option that they had at that time. So that’s not uncommon in that people start there and then the more they learn, the more they research, they understand the importance of holding their own keys, and then they’re ready to move in that other sort of product. The other potential upside to ETFs—and this is not my area—is that people that are going to trade, which again I don’t recommend, in and out between Bitcoin and other assets, the ETF is an easy way to do it. And in theory, that should make the long-term price rise in Bitcoin a little bit smoother. You would think, at least. Anyway, it has the potential to do that. So that also is a potential upside to Bitcoin. So I’m not an anti-ETF person, but I don’t view it as a substitute for obviously holding your own keys, for all the reasons that I’m sure you guys talk about on this show all the time.

Stephan Livera:

Of course. Yeah. And you could see it, like you said, it’s almost like there’s a sales funnel and some people start at the top of that funnel, and for some of those people it’s GBTC is the top of that funnel. And then hopefully over time they go down that funnel and—

Jeff Vandrew:

Yeah. You know what, it’s not all that different from people that buy their first Bitcoin on Cash App or Coinbase or whatever, and they just leave the coins on there. They may leave their coins on there for a year before they figure out why that’s not a good idea. A lot of what we do at Unchained—our message is reaching out to those people to tell them like, Hey, awesome that you bought Bitcoin. Now it’s time for you to take that next step. And I’m sure just even on this show that’s a big part of what you guys do, is by putting this information out there is getting people to take that next step.

Stephan Livera:

Yeah. So when it comes to the size of these big markets, can you give us some context? Roughly how big is this retirement market? The market for saving for retirement, and then the advantaged accounts aspect?

Jeff Vandrew:

Yeah. So it’s huge. It’s important to keep in mind, particularly for some listeners that might be younger and are newer to investing, or even people outside the United States—so in the United States it’s $35 trillion of assets are locked up in tax advantaged retirement accounts. The reason for that is pretty simple: at your employer, it’s like an automatic thing almost to get enrolled into that sort of thing and there’s big tax advantages to doing it. So it’s a very common thing that people my age and older tend to have the bulk of their net worth in tax advantaged retirement accounts. It’s just not an unusual thing at all for a variety of reasons, particularly if you started accumulating those assets as I did, and people older than me, in an era where Bitcoin didn’t even exist yet. So a big part of what I’ve been doing for the past 8 years is helping people unlock those assets and be able to bring them into Bitcoin while still maintaining all those tax advantages, and not having to—in the states, when you liquidate your retirement accounts, there’s a massively negative tax consequence to doing that. You have to pay regular ordinary income tax rates—both the state and federal level—on the liquidation, and then on top of that you have to pay a 10% penalty. So that can be pretty brutal. And that going to drastically reduce the amount of Bitcoin that you’re able to acquire. It’s not at all unusual if you were to liquidate a retirement account that you’re paying like 40% on that, if you’re liquidating it before you’re—in the US, age 59 and a half is the magical age where the 10% penalty goes away. So if you’re doing that before age 59 and a half, you don’t have to be a very rich guy to be paying 40% between federal income tax, the 10% penalty, and then if you live in a state that has state income tax. And that’s like 40% less Bitcoin than you’d be able to buy. So the whole goal in terms of what I’ve done all these years—and now what I’m able to do so much more effectively now that I’m part of Unchained—is to be able to get people to get those assets unlocked, do it in a way that they’re able to have control over their private keys, but still comply with all of the tax laws and regulations so that they don’t take that giant hit.

Stephan Livera:

Yeah. And something I wanted to touch on as well, because people might be thinking about, How do I think about strategically taking the hit per se, if I wanted to try to stack those coins outside of the IRA and retirement accounts system? And I think you were spelling out some of those costs for people. But if you could just spell that out for people, like what kinds of things should they be thinking about? Does it matter where Bitcoin’s price is going? Or is it more just about what is the tax you pay for taking it out now?

Jeff Vandrew:

Right. So if you’re going to liquidate, it’s a very easy calculation. It’s whatever the US dollar value of your account is now. And in terms of where the price is going, I don’t typically advise people to take that into account, because Bitcoin in the shorter term is very volatile. You have to think about it like, when I need these coins in retirement—which for a lot of people is 30 years from now, 40 years from now, for some people it’s shorter, it might only be 10, whatever—where is the price going to be then regardless of next year, 2 years from now. Where is the price going to swing over the short-term?—trying to time that stuff is crazy. So you’re generally just better off—once you realize the importance of this—roll it over, buy in at whatever the price is on that day when the rollover happens. In the short-term, maybe you caught a good period to buy, maybe you caught a bad period to buy, but that’s all going to wash out over such a long time period.

Stephan Livera:

Of course. And so for most people—I mean, obviously you’re the expert, so you tell me—but most people would have some form of retirement savings based on their employer already. And so the question in their minds is, Do I roll that over into a Bitcoin IRA? And they’re also thinking about, Should I make more contributions into that IRA? And I guess that’s also coming into that conversation of whether it’s Roth or not, because I believe one is like, you’ve already paid the tax up front and the other one is like, you haven’t paid that tax upfront, you’re going to pay it at the end.

Jeff Vandrew:

Right. So yeah, there’s a few things to keep in mind there. So one is, we’re talking about employer-based retirement plans, which are not IRAs. So that would be like a 401k, or a 403(b), a TSP, a 457—plans like that. Those typically you cannot roll those out into an IRA until you’ve separated from employment. So most of the clients we see, they’ve changed jobs at some point—it doesn’t even have to be recently—and they have an old retirement account from that job. They roll that to us. They’re good to go. In terms of an employer-based retirement plan when you’re still employed, some employers will allow what’s called an in-service rollover, but most don’t. So that’s a situation where you may have to wait to be able to roll that over. And that creates a decision in terms of, I’m getting tax advantages by contributing: does it make sense for me to keep contributing through work, maybe buy the ETF through my work-based retirement plan, and then when I separate from employment, roll that out, bring it over to a Bitcoin IRA like what we offer at Unchained where you’re able hold your own keys—that’s one method. Or you could stop contributing altogether, stack your Bitcoins outside your IRA. You’re not going to get those tax advantages with regard to contributing, but that might be worth it to you in order to hold your own keys right off the bat instead of having that lag period. You’ll be able to take advantage of the price increases over that lag period, but you’re not going to have those benefits of holding your own keys. So that’s one decision, and that’s a very personal decision. I don’t think there’s a right or wrong answer with respect to that. But to answer more your traditional [IRA] versus Roth question, that’s an important one. So for people who aren’t aware, for assets in a traditional IRA, what that means is those are pre-tax dollars that you’re investing with. Meaning you got a tax break upfront when you contributed those assets. You probably contributed them to a workplace plan and then rolled them into a traditional IRA—that’s the commonplace way to do it. But because you got that tax advantage upfront, when you withdraw them someday in the future after you retire, the amount of the withdrawal is what is taxed, and that’s taxed at ordinary income rates. If we’re talking about a Roth IRA, which you can fund on your own outside of your employer up to $6,000 a year, or you can make Roth contributions to a workplace-based employer plan and then roll that into a Roth IRA when you separate from employment, the advantage there is that when you withdraw those funds in retirement, they’re going to be completely free of all types of tax. So you’re giving up that upfront income tax benefit, but you’re gaining that benefit on the backside. So if you’re very bullish about where the Bitcoin price is going to go between the time that you’re making the contribution and when you project that you’ll be withdrawing them in retirement, Roth is certainly the way to go. And if you have non-Roth funds, either non-Roth funds in a workplace retirement plan that you want to roll over, or you have traditional IRA funds that would also be non-Roth funds, you can do what’s called a Roth conversion. So a Roth conversion converts non-Roth retirement funds to Roth retirement funds. You take an upfront income tax hit for doing that. It’s not as big as the income tax hit you would take if you had liquidated the account, because if you liquidated the account, you pay income tax and a 10% penalty. If you do a Roth conversion, you pay income tax, but you do not pay the 10% penalty. The other advantage to doing a Roth conversion as opposed to liquidating, is those coins after you do that Roth conversion are tax-free forever. Whereas if you had done a liquidation, in addition to paying the extra 10% upfront, you’re also in a situation where when you spend those coins at some time in retirement, you’re going to pay capital gains tax on the appreciation, which would not be the case if you had done a Roth conversion. So one of the things we tell people that are thinking like, Ah, I’d rather take an upfront tax hit to be done with this. Well the way to do that, honestly, is to roll your coins into an Unchained Roth IRA. You’ll take a smaller tax hit than you would have if you had done a liquidation, which means you’re going to acquire more Bitcoin. You’re going to acquire 10% more Bitcoin. And also you’re going to get a tax benefit in the future on the back end when you actually retire.

Stephan Livera:

Yeah. And that could be huge, right? So let’s say you believe the price is going—as many people do—millions of dollars per coin in today’s terms, maybe $10 million, $20 million. Who knows. You might be much more incentivized to go for Roth instead of traditional, right?

Jeff Vandrew:

Yep. To me, the Roth conversion—if you’re young, particularly if your account balance is not very high because you’re young—the Roth conversion’s a no-brainer. Just do it. You’re not going to be eating that much tax, even. And you’re going to have all this future appreciation. And we don’t give advice on whether to do Roth conversions, because you have to talk to your CPA or other tax advisor about that—but we can accommodate whatever you want to do. The math becomes different if you’re 70 years old—your time preference is different. That may be a situation where it makes sense for you to leave those in non-Roth funds, pay zero upfront tax, acquire as many Bitcoin as you can, and then you’re only paying the income tax as you withdraw year by year.

Stephan Livera:

Yeah, interesting. And so that’s really fascinating because your age will really change how you think about that question. And it makes total sense the way you were explaining it. Now, another question that I think age comes into it also: many of us in the Bitcoin world are libertarian-leaning. Not everyone is, but they might be more skeptical about what’s going to happen years and years, decades down the line with the government. They may be thinking, Look, could the government look at this huge pot of funds and try to raid that? Or, could they try to forcefully repurpose some of that retirement money into government projects and say, Look, Jeff, you need to contribute to the roads of your nation. So we’ve redirected some of your retirement funds to this. So does going into this system place the HODLer at a little bit more of a risk from that point of view?

Jeff Vandrew:

Here’s the thing: early in my career doing these, I used to hear this more. I don’t hear it as much today. And the reason for that is: I don’t see the distinction between an IRA versus any other asset you might have. I don’t see why it would be somehow more likely that the government would go after your IRA as opposed to your real estate or anything they could seize—your gold—obviously there’s a precedent in the United States for seizing that. If you’re doing that calculus, and I certainly would never tell anybody to not think about that, but I don’t think you should consider your retirement account any more at risk than any of those other assets. I don’t see why you would. That narrative initially was created in the pre-Bitcoin era by certain promoters that were trying to get people to invest their IRA assets off-shore. I don’t think they had any particular rationale or reasoning as to why IRA assets were somehow more at risk than any other asset that you have, but the narrative helped them sell off-shore IRAs. So I think that that’s where that came from, and the Bitcoiners naturally being skeptical picked up on it, which I don’t blame them for. I think it’s just more of a thing like, Well, if that’s the case, then the only thing that’s going to be safer is if you have coins somewhere that no one knows anything about. If there was a law that you had to turn over your coins or whatever the case might be, and you’re in a position where you’ve decided that if that happens, you’re going to break the law and you have coins that you don’t believe the government knows about—that is a different calculus. But in terms of any coins that the government would have any level of awareness of, or anyone out there that’s like, Hey man, I’m not going to risk going to jail for this kind of thing, then I don’t see the IRA as any more risky. So it’s a personal decision. I don’t object to that analysis. It’s more just that I don’t think you should analyze IRAs as a specific thing that’s different than any other kind of asset. In recent times, the only thing I could think of that would be similar to that was Cyprus—there was a bail-in during the financial crisis?

Stephan Livera:

2013.

Jeff Vandrew:

Yeah. And I don’t even think it affected retirement assets at all.

Stephan Livera:

It was account holders. Basically people just took a haircut, meaning you lost money.

Jeff Vandrew:

Yeah. It wasn’t anything specifically directed at retirement accounts.

Stephan Livera:

Or anything specific.

Jeff Vandrew:

If you’re in a country where retirement accounts tend to be held by the government, like the government holds them as trustee, that’s a different calculus. I could see that’s a situation where it’s just very easy in that case for them to say, Okay, well it’s—

Stephan Livera:

Low-hanging fruit, right?

Jeff Vandrew:

Right. Like, Now X% of these retirement funds that we’re holding in trust for our citizens are going to go to our own government bonds to make the supposed improvements, or whatever the case might be. That’s a real low-hanging fruit. That’s a different situation.

Stephan Livera:

Yeah. So I think that’s a good point, that you really have to think about if you’re operating in the fully legit KYC-compliant world, it’s not really that different whether you’re in IRAs, ETFs, and some other above-board assets. So it would only change somebody’s calculus if they were thinking non-KYC, basically.

Jeff Vandrew:

That’s exactly right. If you’re acquiring your Bitcoins just completely outside the KYC world, or however you’re doing that, then that is a different sort of situation.

Stephan Livera:

Yeah. But that’s a different kettle of fish. That’s another whole bucket. So yeah, that’s interesting for people to know. And I think the other one I really wanted to ask while we’ve got you on today is about McNulty. So I know you’ve probably been asked a thousand questions about McNulty, but if you could just give an overview for listeners, like what is this McNulty case?

Jeff Vandrew:

Yeah, sure. That’d be great. So for people who are interested in this, by the way, I should first say that we just recorded a 1-hour webinar on this case at Unchained: myself and Connor Dolan, who is the head of the IRA product on the client solutions side. Those are our client-facing people. So Connor’s the guy, if you wanted to sign up for an Unchained IRA, if you’re listening out there, that you’d probably be dealing with at your first contact at Unchained. So he and I recorded a 1-hour webinar on the McNulty case actually just yesterday—this is a lot of talking for me over the past couple of days—which should be on our YouTube channel within a few days of this being recorded. But the short story on the McNulty case is it was a case that came out where the taxpayer in McNulty didn’t have Bitcoin at all. She had a certain type of IRA structure called a checkbook IRA structure, which was the structure that I used when I was in private practice for clients in order to hold Bitcoin and hold their own keys. It is not the structure that we use at Unchained. I just want to be clear about that. So she had a checkbook IRA structure that was holding gold, and she used that to effectively hold gold in a safe in her house. I say her because the tax payer was Mrs. McNulty. That’s why it’s called the McNulty case. So one thing that’s very interesting is she was always going to lose this case, because gold has special rules under the internal revenue code that do not apply to other assets. Precious metals must be in the possession of a licensed bank or trust company, is the short story, if you’re going to hold them within an IRA. That’s section 408(m) of the internal revenue code. What is interesting about the case is the court didn’t just say, Oh, well she violated 408(m), so she loses—end of story. They didn’t do that. They actually took it a step further and said, Oh, by the way, if she hadn’t violated section 408(m) of the internal revenue code, she still would’ve lost. And that’s because there’s this concept of constructive receipt that needs to be applicable to IRAs. So for those that aren’t aware, IRAs are all legally structured in such a way that they have to have a custodian that’s a licensed financial institution. So at Unchained, for instance, Solera National Bank is our IRA custodian. We couldn’t do that at Unchained because we’re not a bank. We’re not regulated by a state department of banking. In our solution, the custodian, through a special tri-party delegation agreement, delegates key control to you as the client, and with one of those keys going to us at Unchained. So you always have a quorum of keys—you’re always in control of your coins. We hold one key basically as a backup in case one of your keys is compromised, lost, et cetera, just like any other Unchained vault for those that are familiar with our product. So going back to the McNulty case in terms of constructive receipt, they said, Well, the IRA custodian wasn’t holding this asset, and she could have used these gold bars to buy stuff at any time and nobody would’ve known. So that’s constructive receipt, and it’s deemed then that those gold bars were distributed to her and she’s taxed on them as soon as she had control over them. So what’s very weird about this is constructive receipt is a tax law concept—that’s not new. That’s very commonly used in tax law. And the short story there is: if there’s an asset that someone else is holding for you, but legally speaking it’s payable on demand, meaning you have the legal right for that person to turn it over to you at any time, then you’re taxed on that as soon as you have the legal right to demand that asset, even if you don’t actually demand it. That’s how constructive receipt works. And that makes a lot of sense if you think about it just logically, otherwise it would be very easy to do tax abuse. Now the weird thing though is, constructive receipt in the traditional sense cannot possibly apply to IRAs, because every IRA, even the most milquetoast, plain vanilla legacy financial system IRA with Fidelity or Ameritrade—the most boring company in the world, right?—they’re all payable on demand. Every IRA owner has the right to tell their IRA custodian, Hey, I want to withdraw my assets. And they don’t do some determination about whether you need the money or anything like that. Most of them are all online nowadays, so you just log in, you put in your password, your password is all you need to get that withdrawal, and it shows up in your bank account the next day. That’s the end of it. There’s no real custody there—it’s payable on demand. So they cannot have possibly meant constructive receipt in the traditional tax law sense, because the court did not obviously intend to create a year zero with regard to retirement accounts, in that like every retirement account is now suddenly invalid. So we have to read through the lines with regard to the opinion in terms of what they meant by constructive receipt, because they obviously didn’t mean, as I said, the traditional tax law sense. And the only conclusion you can draw, if you read through that whole opinion, is the thing that really irked the court was that the custodian did not have eyes on the asset. They had no way to know whether she actually spent it or if it was still there, because she could have just pulled it out of her safe at any time, spent it, and they would not have known, because the only thing they were asking from her is—once a year—they were asking her how much gold she had as of December 31st each year. And she could have lied, right? There’s no indication that she did lie in that case, but she could have. And that seemed to be what this concept of constructive receipt was based on. So the Unchained IRA is a more conservative approach, even if McNulty were to become law of the land—and I have to be clear that it is not. So McNulty was a trial court opinion—it was not an appellate court opinion. So what that means is it’s not legally binding on other tax payers other than Mrs. McNulty. However, it could be persuasive if such a case were to go to court again for another tax payer, and also the IRS could choose to adopt it as its position on this matter. They haven’t issued any sort of a formal notice or anything like that. The opinion dropped 4 months ago as we’re recording this and they have not done that, but they could. So if you want to play it conservative and play it safe, you want to comply as best you can with this opinion. So our structure at Unchained is more conservative than the traditional checkbook IRA structure, in that there’s no intermediary entity the way there is with a checkbook IRA that obfuscates what’s going on with the underlying investments. So what I mean by that is: at Unchained with our IRA product, all your IRA coins are held in a very specific designated Unchained vault. The custodian does not have any access to your private keys. You are the only person in the world that knows a quorum of your private keys. Unchained holds one of the three in a 2-of-3 multisig setup. And again, we hold that one of the three effectively as a backup in case to help you out in the event one of your two keys is somehow compromised. But what makes us very different from a checkbook IRA like Mrs. McNulty had, is we do have access to the public keys and the wallet configuration file. And with that, we and the custodian are able to monitor on a consistent basis all of those transactions. So if you were to for instance use your private keys to remove Bitcoin from that designated IRA vault that’s titled to your IRA, we would know about it. And that makes it different from the McNulty situation. We do monitor for that for tax compliance reasons. You’re absolutely entitled to do that whenever you want—when you do it, we report it to the custodian, the custodian reports it to the IRS, so everything’s on the up and up. There’s no potential for tax fraud or anything like that going on there. So that’s why we’re a more conservative approach. When I designed this structure in light of the McNulty case, we tried to design it in a way that if a tax court in the future held our structure to somehow be non-compliant under the rationale of McNulty, they would have to also hold that every discount broker IRA—the millions and millions of them that are in the system already holding plain vanilla legacy financial system assets—they would have to also hold that those were also violative. Because just like an Unchained customer—an Unchained customer can use his keys whenever he wants to pull his coins out of that IRA and do whatever he wants with them. We would see that, we would report it to the IRS. That’s exactly how a legacy financial system IRA works. You use your account password to withdraw at will anytime you want those assets out of your IRA, and spend them on whatever you want. You’re entitled to do that—it gets reported to the IRS. So we’re trying to create a situation where there’s no distinction there, so that we couldn’t be ruled to be non-compliant without millions and millions and millions of other IRAs that are in the legacy financial system also being non-compliant, while also, of course, giving clients access to their own private keys so they know their Bitcoin is actually there. And if there were some kind of collapse in the government or horrible emergency or anything like that, you can absolutely at the drop of a hat withdraw your coins out of that vault. No one can stop you from doing that.

Stephan Livera:

Safety in numbers, eh? But yeah, really interesting.

Jeff Vandrew:

Yeah, exactly.

Stephan Livera:

And I think for people who are operating in the KYC world, as many people are, it’s something to think about, because you have to think about—well just IRAs in general, right? Like choosing the tax advantaged structure if it’s available.

Jeff Vandrew:

And just one point on that too before you move on is: look, if you’ve got a bunch of money in your IRA and you liquidate and you buy Bitcoin, you’re in the KYC system, period. Because if things really hit the fan, they’re going to be like, Well, where did that $500,000 that you pulled out—because they’re going to be notified that you pulled out $500,000 out of your IRA. Like where did that go? That stuff is all traced and tracked. So even if you were to pay all that tax and use all that money to buy Bitcoin, there’s still risk there if you’re talking about buying a substantial amount of Bitcoin. So that enters the calculus too. I’m not shilling for KYC. I’m not saying it’s a good thing. I’m saying these things descriptively in terms of how the world is, not how it should be.

Stephan Livera:

Of course. Yeah, totally. Gotcha. And I think it’s important for people to really think about the long-term, because over the long-term, the income you make is going to pale in comparison to the assets that you stack and let that compound for 30 or 40 years. And so it is an interesting thing for people to think about, especially if you’re young. The younger you are, the more you have to think about at least the long-term compounding factor, because if we’re thinking Bitcoin for the very long term, we’re thinking on multi-decade, 30, 40, maybe even 50-year time scales here.

Jeff Vandrew:

Absolutely. 100%. And what’s cool about working in the IRA world with regard to Bitcoin is that just because of the nature of what an IRA is, everybody’s got a longer time preference. You have to—it’s a retirement asset. It’s not for next week. So Bitcoin fits into that world pretty well just by its nature.

Stephan Livera:

Yeah. And while we’re there, maybe if you could comment a little bit around the inheritance aspects of it also. So let’s say we’re thinking about the 40-50 year time scale. What does it look like then for people who are listening who might be interested—what does it look like for Unchained customers if they’re thinking, I want to be able to pass this on to my heirs. What does that look like at Unchained?

Jeff Vandrew:

Yeah. So we’re at heart a tech services company, so there’s a lot that we can do for you there. On the tech side, one thing I always tell people, which is a true story, is: long before I was a part of Unchained, I had the technical ability to set up a multisig wallet on my own. Just like you do. And I’m confident in my key storage, security, like—I’ve been doing this for a long time. I know how to do all that stuff without anybody helping me out. But I still have my coins at Unchained. And the reason why I did that is because if I died, no matter how much I tried to explain to my family members all this otherwise complicated stuff, they need someone when I’m gone that they can go to to handle all this. To get everything squared away, get possession of these coins, do what they need to do. And that’s a big part of the service that Unchained provides that we don’t necessarily talk about as much, but if you are holding your coins in collaborative custody with Unchained and you pass away, and those coins through your will or whatever estate planning device that you’ve set up with your estate planning attorney, go to a family member who—even if they know about Bitcoin and know how to custody Bitcoin—they may not know it well enough if they’re inheriting more. Because the level of security you have, if you hold 1 Bitcoin may not be the same as if you hold 50. I think that’s a fair statement. So even if the person that you’re leaving those assets to has some Bitcoin, they may not really know how to deal with the security aspects of a larger amount. So whoever that is, no matter what their technical ability is, they can come to us after you pass away, and our concierge team will hold their hand and walk them through the entire process in terms of how to access those coins that belong to you when you die, how to store them appropriately going forward now that they have access to them—all that sort of stuff. We’re always here to help on that point. And I think that should be a big comfort to a lot of people in terms of making sure—the other part about that too is we’re going to make sure that your beneficiaries are comfortable with self-custody, because otherwise if they don’t have anyone to help them with that, they may end up just throwing the coins on Coinbase and not wanting to deal with it and just doing a custodial solution. So that’s a piece of the picture in terms of what we do at Unchained that’s not legal in nature, but it’s very important in terms of how inheritance works. And with your estate planning attorney, if you’ve devised a trust or something of that nature, which there are a variety of reasons that you may want to do that, our Unchained vaults, we offer not only personal vaults, we also offer vaults for trusts. And we can accommodate multiple trustees of a trust—the whole nine yards. However you want to handle that thing for Bitcoin. That’s held in trust for your loved ones.

Stephan Livera:

Yeah. And I think this is something where we often act as though we’re invincible and we don’t want to think about our death and what are we going to do on that? So yeah, just every now and again, bring it up and really think about it: have you got a plan in place? The other area I was just thinking now, is, as we look out in terms of the future regulatory, legal, are there any things that you see as being a risk to Bitcoin IRA structures? Or do you see that as relatively stable, legally?

Jeff Vandrew:

I see it as relatively stable. There have been a lot of proposals to change the way alternative investments and IRAs are handled even over the past 2 years, and none of them have really gone after Bitcoin. What they’re more interested in right now are checkbook IRA structures, because I think that the idea is they feel those have a potential for more tax abuse. Although I don’t know how much they’re actually being abused. I set them up for years before I came to Unchained and I certainly never assisted my clients in abusing the tax code, and I don’t get the impression that many of them did. But that aside, that’s the perception. So there have certainly been legislative proposals around checkbook IRAs. And the thing they’re actually really concerned about is private equity-type investments. There are a lot of proposals around prohibiting that because what goes on there is: people with a small balance in a Roth IRA, were doing stuff where like, let’s say I have a startup and I know it’s going to be big within the next few years. And I have some real small amount in my Roth IRA, like $5,000. And I’m president of this startup, so I obviously have a large degree of control over it. I may use my role in this company to sell a boatload of shares in my company to my IRA—well I’m not selling them, but the company is issuing a large amount of equity in this company to my IRA at 10 cents a share or something like that. And there’s a legal argument to be made because it’s totally illiquid and speculative—is that 10 cents fair? And it might be at that time, in theory, in terms of valuation. And then the company’s worth like a billion dollars 5 years from now and that billion dollars is now—if it’s in a Roth IRA—removed from taxation forever. So the reason this came on the congressional radar is ProPublica did a hit piece on Peter Thiel with regard to this—I’m not even saying he did anything wrong—but he did something we’ll just say very savvy with his Roth IRA that acquired a large stake in PayPal when he was involved in PayPal. And then the massive amount of appreciation on his PayPal shares went totally untaxed for that reason. That’s the kind of stuff they seem to be very focused on right now.

Stephan Livera:

Yeah. And I guess even aside from IRAs, do you see any other risks coming down the horizon, or at least as you look at let’s say the political landscape from a Bitcoin point of view? Do you see anything there?

Jeff Vandrew:

Just the KYC stuff that we’re all aware of. And that’s not my area of legal expertise, but just the idea where there have been these legislative proposals around travel rules and things of that nature. At this point, I think that’s probably the most important stuff to try and fight.

Stephan Livera:

Yeah. So I’m curious your thoughts then there as well. Do you believe that there should be some effort to lobby to try to change those laws or at least to minimize the impact of those kinds of laws?

Jeff Vandrew:

Yeah. Look, I’m really pragmatic about this stuff. So yeah, bad laws that are bad for Bitcoiners, I think it’s worth time to lobby against them. I take it as simply as that. Lobbying is not my area, but there are people that are doing that, and I think it’s a worthwhile effort.

Stephan Livera:

All right. Well yeah, so I guess let’s wrap up then if you’ve got any closing thoughts for listeners around Bitcoin IRAs, why they should think about it, let’s leave it there. And of course, where can people find you?

Jeff Vandrew:

Yeah. So a couple things: one I said, we just did a McNulty webinar that’s very popular. They will be a link in there for an article that I wrote on the Unchained blog that goes point by point through the opinion if you’re not a video guy and you want to read something instead. And then if you’re interested in talking to someone about setting up an Unchained IRA, if you go to unchained.com, you can schedule a consultation with one of our fantastic client solutions people, and they will walk you through the whole product to tell you what we have to offer. And you can go from there.

Stephan Livera:

Fantastic, Jeff. Thanks very much for joining me today.

Jeff Vandrew:

Thanks for having me, man. It was a blast.