Beware of investing IRAs in NFTs (non-fungible tokens). In Notice 2023-27, the IRS said that NFTs associated with “collectibles” are prohibited IRA investments. This could expose you to significant taxes and penalties. IRAs are subject to strict prohibited transaction rules to ensure that an IRA owner does not engage in self-dealing. But only a few IRA investments are prohibited: collectibles, life insurance, and S-corporation stock.

So, what is a collectible? Under the tax code, it includes:

  • Work of art;
  • Rug or antique;
  • Metal or gem;
  • Stamp or coin (except for certain gold coins or silver coins minted by the Treasury Department, as well as certain bullion);
  • Alcoholic beverage; or
  • Other tangible personal property specified by the IRS.

“Deemed Distribution”

Notice 2023-27 says that an NFT is a collectible if it is associated with any of these prohibited collectibles. This would occur if the NFT either gives the NFT holder a right to a prohibited collectible or certifies ownership of a prohibited collectible.

If an NFT is considered a collectible, then an IRA investment in the NFT is prohibited and would result in a “deemed distribution” to you in the year of your investment. (It’s called a “deemed distribution” because you don’t have to withdraw the collectible from the IRA when the distribution on the investment occurs.) The amount of the distribution is the original cost of the collectible.

If you are investing a traditional IRA in a collectible, all or part of the deemed distribution may be taxable. And if you are under age 59 ½, you may also be subject to a 10% early distribution penalty.

By contrast, if you’re investing a Roth IRA in a collectible, the deemed distribution would not be taxable if the distribution is “qualified.” To be qualified, the investment must have been made after any of your Roth IRAs has been held for at least five years and when you are at least age 59 ½. If the distribution is not qualified, the Roth IRA ordering rules apply, and all or part of the distribution may be taxed to you.

Navigating NFT Investments in Your IRA

So, think carefully before making any new IRA investments in an NFT that is associated with a prohibited collectible. But what if you already have that type of investment in your IRA? Any IRA investment in NFTs made before 2020 would probably be OK since any IRS issues would be barred by the usual three-year IRS statute of limitations. However, it’s not clear whether the IRS will retroactively go after investments made after 2019 but before March 21, 2023 (the date Notice 2023-27 was issued). If you are in that boat, by all means, see a CPA or tax attorney for advice.


By Ian Berger, JD
IRA Analyst

Copyright © 2023, Ed Slott and Company, LLC Reprinted from The Slott Report, 2022, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Content posted in Ed Slott’s IRA Corner was developed and produced by Ed Slott & Co. to provide information on a topic that may be of interest. Ed Slott and Ed Slott & Co. are not affiliated with Ethos Capital Management, Inc. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.  The tax information provided is general in nature and should not be construed as legal or tax advice. Information is derived from sources deemed to be reliable. Always consult an attorney or tax professional regarding your specific legal, or tax situation. Tax rules and regulations are subject to change at any time. Ethos Capital Management, Inc. is a registered investment adviser. The firm only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.