The growing asset class has caught the attention of the IRS, which wants to tax NFTs as collectibles. This ruling may hurt investors who wish to include these digital assets with their self-directed IRA.
ROSELAND, NJ, May 06, 2023 /24-7PressRelease/ — Self-directed IRAs allow investors to include many types of alternative assets in their retirement accounts with a few exceptions: collectibles and insurance policies, according to IRS guidelines. Among the many allowable investments currently are digital assets known as nonfungible tokens, also called NFTs.
NFTs are usually digital artwork or photography, videos, memes, GIFs and social media posts, music, sports, gaming, and even clothing for avatars to wear in digital universes. They aren’t new, but their popularity is growing among investors, including those who self-direct their retirement plans. However, Americans’ growing interest in NFTs has caught the attention of the IRS and the United States Treasury Department for tax purposes.
As Next Generation Trust Company shares, an IRS ruling on these digital assets as collectibles may restrict self-directed investors from including these in their self-directed IRAs.
“NFTs comprise a growing asset class that is currently allowed in a self-directed IRA,” noted Jaime Raskulinecz, CEO of Next Generation, a full-service administrator and custodian of self-directed retirement plans. “However, if the IRS determines that NFTs are collectibles, these assets will be prohibited for self-directed investors.”
Raskulinecz said that the big question on the table right now is whether the IRS will rule these assets as collectibles. “Collectibles” refers to works of art, rugs, antiques, certain metals, gems, stamps, alcoholic beverages, or other tangible personal property specified by the IRS. Since nonfungible tokens are not tangible but digital, there may also be the question of how the assets may qualify as collectibles. There are currently no specific guidelines about NFTs in this regard.
The IRS and Treasury Department issued Notice 2023-27 in March to solicit feedback for guidance regarding the tax treatment of nonfungible tokens. The public comment period ends on June 19, 2023, after which the agencies will issue final rules about NFTs’ status as collectibles under tax law.
“If the IRS judge rules that the NFT’s associated right or asset is a collectible as currently defined in the tax code, then the NFT is also a collectible,” said Raskulinecz. “For self-directed investors, this could spell the end of including these digital assets within their self-directed IRA, since collectibles comprise an excluded asset class. At Next Generation, we are following the matter closely and will keep our clients and website visitors apprised of any IRS final rules or guidelines about the tax treatment of NFTs.”
For more information about the types of alternative assets allowed in self-directed retirement plans, visit www.NextGenerationTrust.com.
About Next Generation Services and Next Generation Trust Company
Founded on the philosophy that every person should have control over their retirement plans, Next Generation educates consumers and professionals about self-directed retirement plans and nontraditional investments, a strategy at one time reserved only for the very wealthy. Next Generation Services provides comprehensive account administration and transaction support, and its sister company, Next Generation Trust Company, acts as custodian for all accounts. Next Generation’s neutral third-party professionals expertly guide clients and their trusted advisors as part of their white glove, personalized service for a seamless transaction experience from start to finish. For more information, visit www.NextGenerationTrust.com, or contact Next Generation at 888.857.8058 or [email protected].
NFTs (nonfungible tokens) have a unique digital identifier that certifies the authenticity and owners of a right or asset. The identifier is recorded using distributed ledger technology. The transaction is recorded, shared, and synchronized on multiple nodes on a computing network. The “token” is an encoded data entry on the ledger. As a nonfungible asset, the item is not easy to exchange or mix with other similar goods or assets. Therefore, due to their unique digital signatures, each NFT is valued differently, NFTs cannot be exchanged for nor are equal to one another, and remain unique and separate.
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