For the past several years, investing in NFTs through a retirement plan has been somewhat of a gray area. The reason is that the IRS has never officially clarified whether they were considered an asset or a collectible, which would not be allowed as an investable asset class in a retirement plan. Still, because the IRS never officially stated that NFTs are collectibles, people still continued to invest in them through self-directed retirement plans.
Is investing in NFTs through a Roth or traditional IRA allowed by the IRS?
Yes, you are allowed to invest in NFTs through retirement plans.
In October 2022, the IRS released new guidelines that state that NFTs are now treated as a digital asset, and will not be classified as a collectible. Digital assets are investable through retirement plans like an IRA, but the process is more complicated than investing in traditional assets. To invest in NFTs through an IRA, you’ll need to open a special type of IRA that lets you invest in alternative assets that include NFTs.
How to invest in NFTs with an IRA
Regular IRAs that you can open at major banks and institutions do not give you the option to invest in any alternative assets, like NFTs. Instead, your investment options are limited to traditional assets like stocks, bonds, mutual funds, and ETFs.
To invest in NFTs through an IRA, you’ll need to find a self-directed IRA (SDIRA) that specifically lets you invest in digital assets like cryptocurrencies and NFTs. Self-directed IRAs can be both Roth or traditional IRAs and are special kind of IRAs that let you invest in alternative assets.
What is a self-directed IRA?
A self-directed IRA (SDIRA) is a special type of IRA that lets you invest in alternative assets like gold, real estate, private equity, cryptocurrencies, and NFTs. They’re subject to the contribution limits, distribution rules, and tax advantages as regular IRAs, but only differ in that you have more freedom to invest in assets outside of just traditional investments.
What can I invest in through a self-directed IRA?
- Real estate: This can include residential properties, commercial properties, undeveloped land, and real estate investment trusts (REITs).
- Private equity: Investments in privately held companies or startups that are not publicly traded on a stock exchange.
- Precious metals: Physical gold, silver, platinum, and palladium that meet specific purity requirements.
- Private lending and notes: Providing loans to individuals or businesses and holding promissory notes as investments.
- Limited partnerships and limited liability companies: Investments in businesses organized as partnerships or LLCs.
- Tax lien certificates: Investing in tax liens issued by local governments on delinquent properties.
- Crowdfunding and peer-to-peer lending: Participating in crowdfunding platforms or peer-to-peer lending networks to invest in various projects or provide loans to individuals and businesses.
- Cryptocurrencies and digital assets: Some self-directed IRAs may allow investments in cryptocurrencies like Bitcoin, Ethereum, or non-fungible tokens (NFTs), though this may be subject to the specific IRA custodian’s policies and regulations.
Not all self-directed IRAs let you invest in the same alternative assets. Many are specialized to help you invest in a specific asset class like real estate or crypto. If you want to invest in NFTs through your SDIRA, you’ll have to find a plan provider that specifically lets you invest in digital assets like NFTs.
Benefits of investing in NFTs through an IRA
Outside of retirement plans, NFTs are taxed as capital assets. If you sell any NFTs for a profit, you’re required to report the earnings to the IRS and pay capital gains taxes. However, through a retirement plan, you’ll have tax-free growth, and if investing through a Roth IRA, you’ll also enjoy tax-free withdrawals in retirement no matter how large the profits from your NFTs may be.
Since NFTs are highly volatile assets that can produce bigger gains than traditional asset classes, investing in them through a retirement account lets you compound 100% of your profits back into your account rather than having to pay capital gains taxes for each profitable trade.
Also read: Benefits & Tax Advantages of a Roth IRA
Investing NFTs through a traditional IRA vs Roth IRA
There are two types of IRAs: traditional and Roth.
With a traditional IRA, you make contributions with pre-tax income (money you haven’t paid income taxes on) and get a tax deduction for the tax year that you contribute. Your investments grow tax free, but you’ll have to pay regular income taxes when you start taking distributions in retirement.
With a Roth IRA, you make contributions with post-tax income (money you’ve already paid income taxes on) and you don’t get any tax breaks when you contribute. However, your withdrawals in retirement are completely tax-free.
For example, if you invest in $1,000 in an NFT through a Roth IRA, and it grows to a value of $100,000, you don’t owe any taxes when you withdraw your profits in retirement. However, if you invested the same amount through a traditional IRA, and it grew to the same value, you would have to pay regular income taxes on the withdrawal of $100,000 in retirement.
Are NFTs considered as collectibles?
In the past, it wasn’t clear whether the IRS considered NFTs as collectibles since they never provided any clear guidance on the matter. However, after the new guidelines released in October 2022, NFTs are officially considered as capital assets, not collectibles, and can be invested in through a retirement plan like traditional and Roth IRAs.
How much money can I put into an IRA to invest in NFTs?
A self-directed IRA has the same contribution limits as regular IRAs. For 2023, you can contribute up to $6,500 ($7,500 if age 50+) into an IRA. This limit is shared between all of your IRA accounts, whether they’re regular IRAs or self-directed.
For example, if you have regular Roth and traditional IRAs, and you contribute $2,000 into each account, you’ll have used up $4,000 out of your total IRA contribution limit for the 2023 tax year, which is $6,500 ($7,500 if age 50+). That means you can contribute up to $2,500 into your self-directed IRA if you’re under 50 years of age, or up to $3,500 if you’re over 50 years of age.
The Roth IRA has income limits
For 2023, your income must be under $138,000 in order to contribute the maximum amount of $6,500 to a Roth IRA, or $7,500 if you’re over 50 years old. If your income is higher than $138,000 but less than $153,000, you can still make contributions, but your limit gets reduced. If you make over $153,000, you cannot contribute at all.
- If your income is $138,000 or less, you can contribute up to the maximum Roth IRA contribution limit of $6,500 ($7,500 if age 50+).
- If your income is over $138,000 but less than $153,000, your contribution limit gets reduced.
- If your income is over $153,000, you cannot contribute at all.
If your income exceeds the Roth IRA income limits for the year, you still have the option to do a backdoor Roth IRA, which involves contributing to a traditional IRA, which has no income limits for making contributions, and then immediately converting the funds into your Roth IRA. The income limits only apply to contributions, and rollovers are allowed no matter how much income you earn during the tax year.
How do I withdraw my NFTs from my IRA?
You’re not allowed to withdraw NFTs directly from your IRA. It’s possible to rollover your NFTs to another self-directed retirement plan like the solo 401k, but you cannot take a distribution out of the account directly as an NFT. To take a distribution out of your IRA, you’ll first have to sell your NFTs.
The withdrawal rules are slightly different depending on whether you invested through a traditional IRA or Roth IRA.
If it’s a traditional IRA, you have to wait until you reach the age of 59½ to take distributions without any penalties. If you withdraw earlier than the age of 59½, you’ll have to pay a 10% early distribution penalty plus income taxes on the amount withdrawn.
Also read: Traditional IRA Withdrawal Rules
If it’s a Roth IRA, you could withdraw your contributions from your account at any age without penalties or taxes. However, to withdraw any earnings from your account, you’ll have to wait until your Roth IRA is at least 5 years old, and you reach the age of 59½.
Also read: Roth IRA Withdrawal Rules