Investing in NFTs in an IRA
There is a relatively new asset class clients have inquired about called NFTs. NFTs have been a popular topic of conversation in the last year, especially among celebrities.
Steph Curry, Dez Bryant, Lindsay Lohan, Snoop Dog, and Logan Paul are just a few celebrities that have shared in NFT investing. You may have even seen, or are still seeing, your favorite athletes showcasing their NFT as their profile picture on social media.
What is an NFT?
NFT stands for Non-Fungible Token. Fungible assets can be traded or exchanged for another. You can exchange one bitcoin for another bitcoin; a US dollar is always worth another dollar. Non-fungible means it cannot be replicated; it is one of a kind. You cannot exchange an NFT for an exact copy, however. One NFT is not worth the same as another NFT.
But why would I buy an NFT when I can copy and paste the same NFT picture you tell me cannot be replicated and is one of a kind? You can indeed copy and paste it. However, the NFT itself can be verified as being owned by someone on the blockchain network. Most NFTs are on the Ethereum or Solano network.
Think of an NFT as a unique fingerprint identifying yourself amongst everyone else in the world. Once the NFT content is logged on the blockchain, NFTs can be bought and sold, and it becomes a digital asset. All transfers and sales of that specific NFT are recorded on the blockchain network, creating a price and owner history. So although you can copy and paste the same NFT picture I bought, you cannot claim ownership and therefore benefit from the perks an NFT can grant.
Perks of an NFT
The NFT can function as a membership card, ticket to an event, give you early access to promotions, and receive other NFTs via an airdrop. However, not all NFTs offer these perks, nor do they have to provide you with perks at all.
NFTs are also not limited to just pictures. NFTs can be anything digital (i.e., drawings, music, movies, in-game content for a video game, and GIFs). Still, much of the current excitement is around using technology to sell digital art. NFTs allow artists to share their work and receive royalties whenever their work is sold or changes hands.
NFT royalties, although not required, are often written in the contract on the blockchain. The artist can choose their royalty percentage when creating an NFT, which usually ranges from 5-10%. Therefore, anytime an artist’s work is sold or even resold, it gives the original artist a portion of the sales price each time for the life of the NFT.
Are NFTs In an IRA Allowed?
The IRS hasn’t provided guidance on whether IRA accounts can invest and hold NFTs. The IRS explicitly states IRAs cannot hold life insurance or collectibles as investment options.
Internal Revenue Code Section 408(m)(2), a collectible is any:
- Work of art
- Rug or antique
- Metal or gem (with limited exceptions)
- Stamp or coin (except for coins issued under the laws of any state)
- Alcoholic beverage
Overall, the process for purchasing an NFT has a lot of room for improvement. It is currently a tedious process with many areas of uncertainty. Always consult with an attorney or tax advisor prior to making an investment in your IRA.
MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.
Written by Andy Anger
Client Services Team Lead at Midland Trust Company