Although traditional investment options still exist in the stock market, there are many more new types of investments being utilized. One of these new investment options is Non-Fungible Tokens (or NFTs) which are quickly emerging as an investment choice for many investors.
NFTs are a relatively new way to invest in cryptocurrencies where each token is uniquely identifiable by its owning party. While this can lead to some confusion, there is still much more information on how self-directed IRAs can go forward with investing in NFTs, such as how they can transfer tokens and how they go about buying them, selling them and even storing them. In this article, we are going to discuss the same.
Investing in NFTs: Can You Buy NFTs in your Self-Directed IRA?
What is an NFT?
An NFT is an asset that is supported by a blockchain and can be traded like a traditional stock. The name stands for Non-Fungible Token and describes the idea that each token is unique and has value, unlike traditional stocks.
NFTs are similar to cryptocurrencies, but they’re not decentralized, meaning no one is in charge of keeping them safe, secure or reliable. Instead, NFTs are secured by the blockchain ledger that keeps track of all transactions made with them.
Example: A digital artwork can be stored in a smart contract on the Ethereum blockchain and will be transferred to someone if they pay with Ether (the currency used for Ethereum transactions).
NFTs are different from other cryptocurrencies because they’re non-fungible — meaning each asset has its own unique characteristics and cannot be exchanged with another. An NFT can’t be sold or traded like a stock because it’s an individualized piece of art or physical object that doesn’t have monetary value outside of its rarity and uniqueness.
NFTs are becoming more popular among investors because they offer several advantages over traditional investments like stocks and bonds. One of the main advantages is security — NFTs are almost impossible to counterfeit because they rely on a decentralized blockchain ledger system for storing information about each piece of art.
If someone tries to alter or fake one of these pieces, all of the information about that piece will be changed in response — making it impossible for anyone else to duplicate this work without access to every single piece of data about it.
What is a Self-Directed IRA (SDIRA)?
A self-directed individual retirement account (IRA) is a type of retirement account offered by most financial institutions. This type of investment account is designed to help you invest your money in the manner that best fits your personal goals and financial situation.
You can set up an IRA anytime, and it doesn’t require any details on your income to open it. You can choose how much you want to contribute, what types of investments you want to make, and when you want those investments to be made.
A self-directed IRA allows investors to make all investment decisions on their own. They are also able to direct their own investments through buying, selling and redeeming shares within the account. A self-directed IRA can even allow for a tax deduction for certain types of assets like stocks and bonds.
Can You Buy NFTs with Your SDIRA?
The short answer is maybe. This is because there are essentially no rules in place for self-directed IRAs to invest in digital assets. You can use a Crypto IRA to invest in cryptocurrency; however, there are some important things to keep in mind before investing in NFTs.
First, NFTs are a gray area right now as the IRS hasn’t yet issued specific guidance on NFTs, nobody knows for sure if they will count as collectibles. As such, you should consult with your legal advisor before purchasing any NFTs or other digital assets, as they may not be eligible to be held within your IRA account.
Second, it’s important to note that since NFTs are considered property rather than securities or collectibles — meaning they don’t meet the criteria required for traditional IRAs. It’s difficult to determine whether or not you can hold them within an IRA account without violating the IRS rules against prohibited transactions.
It isn’t recommended to hold NFTs in your self-directed individual retirement account because the risk of having NFTs in your SDIRA is the same as holding any unallowed collectable. When you put your NFTs in an IRA, the IRS considers the value of that item to be distributed to you in the tax year that you made the investment. Therefore, instead of holding an NFT in your SDIRA, you should consider buying it with your separate funds.
Much Thanks to Akanksha Malik for sharing her knowledge of investing in NFTs with Leisure Freak readers. A subject that I’m sure many have had little exposure to, including myself. Knowledge is always important and keeping up with the latest investment developments in this world is a big part of that.
Akanksha Malik is a content creator & digital strategist at Mesha – India’s largest investing club & online community where the world’s best investors gather to share ideas, discover fellow investors, invest in NFTs & crypto, and compete in challenges for real money. She develops content to share her knowledge and insights helping her readers stay updated with the latest in fintech & investments, as well as cryptocurrency trends and upcoming NFT opportunities. Apart from being passionate about her work, Akanksha loves exploring architectural sites and different local dishes during her travels.