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April 4, 2023

IRS Addresses IRA Investments in NFTs


With the rise of digital assets such as non-fungible tokens (NFTs), one question that has arisen is whether NFTs are permissible IRA investments. In general, NFTs are unique digital identifiers that may be used to certify ownership of an associated right or asset. For example, NFTs may certify the holder’s ownership of a digital file (such as an electronic image, music, or video), a physical item (such as a pair of sneakers), or an associated right to attend an event. Since IRAs are not permitted to hold “collectibles” (including gems and metals, antiques and rugs, stamps and most coins, art and alcoholic beverages), there is an issue as to whether NFTs may be treated as collectibles. The IRS recently announced in Notice 2023-27 (Notice) that, pending further guidance, the IRS intends to look through an NFT to its associated right to determine whether the NFT is a collectible. The Notice provides, for example, that if an NFT’s associated right is ownership of a gem, then the NFT is a collectible because a gem is a collectible. On the other hand, if the NFT’s associated right is the right to use or develop a plot of “land” in a virtual environment, then the IRS will not treat the NFT as a collectible because, according to the IRS, the right to use or develop the plot of virtual land is generally not a collectible.

With respect to NFTs associated with a digital file (such as an image, music, or video), the IRS is still considering whether such NFTs constitute “art” and thus are collectibles for purposes of the IRA rules. The IRS states in the Notice that it intends to issue guidance on the treatment of NFTs and has requested public comment on or before June 19, 2023 on the issue of IRA investments in NFTs.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.