Can I Hold NFTs in My IRA?
Lately, our clients have been asking if they can hold NFTs (non-fungible token) in their IRAs (Individual Retirement Account). It is a complex decision that depends on various factors. Here are some considerations to keep in mind.
First, as described in the IRS Rev. Rul. 2019-24, “A non-fungible token (NFT) is a unique digital identifier that is recorded using distributed ledger technology (blockchain) and may be used to certify authenticity and ownership of an associated right or asset. A token is an entry of data encoded on a distributed ledger. A distributed ledger can be used to identify ownership of both NFTs and fungible tokens.”
Second, in 2023, the IRS issued Notice 2023-27 in which they announced that they are soliciting feedback for upcoming guidance on how to treat NFTs as collectibles under the tax law. Until additional guidance is issued, the IRS intends to determine when an NFT is treated as a collectible by using a “look-through analysis.” “Under the look-through analysis, an NFT is treated as a collectible if the NFT's associated right or asset falls under the definition of collectible in the tax code. For example, a gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible.” What can you do? In the case that you own an NFT in your IRA and/or 401(k) you should analyze if the NFT is an asset as described in the IRS Section 408 or not. If it is not, the next step is to wait for future IRS guidance. To learn more about NFT as art collectibles you can read Kristan Anderson’s blog “If You Can’t Touch It, Is It Really Art?”.
Third, different IRA providers may have different rules regarding what type of assets can be held within an IRA so it’s important to review the terms and conditions to determine if your IRA provider allows holding NFTs.
Fourth, a significant benefit of holding assets in an IRA is the potential for a tax advantage. Traditional IRAs offer tax-deferred growth, while Roth IRAs offer tax-free growth. Understanding the tax implications is crucial since it can impact your overall investment strategy and retirement planning. Although we are not tax and law professionals, we understand that some NFTs can trigger a big tax consequence. If an NFT is treated as a collectible, the original cost will be treated as a taxable distribution (and a 10 percent penalty will apply if the owner is under 59½ years old). Even if the NFT has decreased in value, the tax base will be the original cost. The tax damage could get even worse since the NFT can cause a prohibited transaction (example: borrowing money from an IRA, selling property to it, using it as security for a loan, buying property for personal use).
Fifth, NFTs can be highly speculative, illiquid, and the value can be subjective and volatile. This affects sales of NFTs and thus why it is important to evaluate if such assets align with your long-term retirement goals and risk tolerance.
Based on the above, we conclude that holding NFTs in your IRA depends on your individual financial situation, investment and tax strategy, risk tolerance, rules and regulations governing your IRA, as well how the IRS will determine if an NFT is collectible or not. Always speak with your financial and tax advisor before investing in NFTs in your retirement accounts.
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