What is an NFT?
NFTs are getting a lot of press. What is a Non-Fungible Token? We know that Dollars, Precious Metals, even Cryptocurrency are fungible. My $5 bill is no different than your $5 bill, and your 5.2 Bitcoin is the same value as the next person’s 5.2 Bitcoin. However, each NFT is unique, thus the descriptor of non-fungible. Non-interchangeable.
Let’s say someone has a mint condition Micky Mantle rookie card (1952 Topps #311). Today that would be worth $5 million. Well, that’s what Mr. Google says. The card owner could create five million NFTs and sell them for $1.00 each.
Time goes by and the card triples in value to $15 million. You sell your 500 Micky Mantle Rookie Card (1952 Topps #311) NFTs someone. The NFTs you sold are non-fungible, and those NFTs, are and always will, represent ownership in that single baseball card.
Herein lies part of our answer to the question, “Can I invest in NFTs with my Self Directed IRA?”.
IRC §4975 prohibits IRA investments in collectibles. No doubt the underlying asset, the Micky Mantle baseball card, is a collectible. Just like a painting or any of the other NFTs sold.
HOWEVER, what if the underlying asset is not a collectible? We see some people buying virtual land in virtual cities generated by computer software. Is that a collectible? We know your IRA can invest in real land, in real places. But what about virtual land?
Fortunately, there is a pattern we can follow. This very question came up years ago regarding Cryptocurrency. The IRA industry was unsure how to treat Cryptocurrency until the IRS released Notice 2014-21. The IRS considered Cryptocurrency property for tax purposes, and the IRA industry knew it could treat $100,000 of Cryptocurrency the same as a $100,000 house or $100,000 plot of land. Learn more about having Cryptocurrency in an IRA here.
Is It Allowed?
- An investor might say, “The IRS does not specifically prohibit NFTs; hence, NFTs in an IRA are permissible.”
- I might reply, “The IRS, by its action of releasing 2014-21, told us the following: when new asset classes come along, they (the IRS) will provide guidance. As for now, I suggest we wait for the IRS guidance.”
- To answer our original question, “Can I invest in NFTs with my IRA?”
- Maybe, however, I suggest we wait till the IRS provides us with its guidance.
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