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New IRS Guidance on NFTs in a Retirement Plan

New IRS Guidance on NFTs in a Retirement Plan

On  March 21, 2023, the Treasury Department and the IRS issued Notice 2023-27 which announces that they are soliciting feedback for upcoming guidance regarding the tax treatment of a nonfungible tokens (NFT) as a collectible under the tax law.

Notice 2023-27 states that the IRS intends to issue guidance that treats certain NFTs as collectibles for purposes of Internal Revenue Code (IRC) Section 408(m).  It further lays out the approach the IRS is considering and asks for comments by June 19, 2023.

For retirement account investors, the determination of whether an NFT is a collectible under IRC 408(m) is crucial as to whether the asset can be purchased by a retirement account.

Key Points
  • IRS Notice 2023-27 seeks public feedback about NFTs
  • While there is no new legislation to report, the Notice gives us an idea of future plans
  • Determining if an NFT is considered a collectible is important for retirement account investors because of the prohibited transaction rules

What is an NFT?

With the growth of digital assets, there have been questions raised about whether or not an NFT is a “collectible.” This is especially pertinent for retirement investors who are not permitted to invest in collectibles, but also individuals who would pay a higher capital gains tax rate (28%) if the underlying asset is deemed a collectable.

As per the IRS, a nonfungible token (NFT) is a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. Distributed ledger technology, such as blockchain technology, uses independent digital systems to record, share and synchronize transactions, the details of which are recorded simultaneously on multiple nodes in a network. A token is an entry of data encoded on a distributed ledger. A distributed ledger can be used to identify ownership of both NFTs and fungible tokens, such as cryptocurrency.

There are many different forms of NFTs including:

  1. Digital artwork/photography
  2. Music
  3. Digital collectibles
  4. Memes
  5. Social media posts
  6. Sport NFTs
  7. Gaming NFTs
  8. Utility (community)

Notice 2023-27 does not actually offer specific guidelines as to whether a certain type of NFT would be deemed a collectible.  Instead, it seeks public comments before issuing any final rules or guidelines.

Related: Alternative Investments in an IRA

What is a Collectible Under Code Section 408(m)?

IRC Section 408(m) provides that IRAs and 401(k) defined contribution plans may not invest in “collectibles,” or, more specifically, if that occurs, the plan is treated as distributing the cost of the collectible.  The term “collectible” means any work of art, rug, antique, metal, gem, stamp, alcoholic beverage, or any other tangible personal property specified by the IRS.  There are exceptions for specific kinds of coins and bullion.  The definition of collectibles is incorporated into other rules in the Code, for example, in 408(m), collectibles are subject to higher capital gains tax rules in IRC Section 1(h).

What Does Notice 2023-27 Actually Say?

Notice 2023-27 is relevant because it is the first formal notice that addresses how the IRS intends to view NFTs from a tax perspective.  However, the notice does not actually set forth any formal rules and guidelines on the tax treatment of NFTs, but instead seeks public comment so it can make a more informed decision.  In this case, the IRS is taking a more inclusive approach, which is commendable.

However, the Notice does offer a peak into how the IRS is thinking about the tax treatment of NFTs.  It is clear that the IRS intends to analyze whether the NFT’s associated right or asset is a Section 408(m) collectible (referred to in this Notice as the “look-through analysis”).

The Notice then goes on to provide an example of how the “look-through” analysis would work. For example, a gem is a section 408(m) collectible under section 408(m)(2)(C), and therefore an NFT that certifies ownership of a gem constitutes a section 408(m) collectible.  The same analysis would likely treat an NFT that certifies ownership of a piece of art as a collectible.  On the other hand, the Notice provides an example of an NFT that would not constitute an NFT.  For example, a right to use or develop a “plot of land” in a virtual environment generally is not a Section 408(m) collectible, and therefore, an NFT that provides a right to use or develop the plot of land in the virtual environment generally does not constitute a section 408(m) collectible. 

What is the Impact of Notice 2023-27 on Retirement Accounts?

IRS Notice 2023-27 is important because it is the first time the IRS has issued some form of guidance on the tax treatment of NFTs, which is important for both retirement account and personal investors.  Similarly, it is important because it introduces the concept of the “look-through” analysis as a test to determine whether an NFT investment should be treated as a collectible as per IRC Section 408(m).  In addition, it states clearly that the IRS believe that digital files are not included under any of the categories listed in section 408(m)(2)(B)-(E) (any rug, antique, metal, gem, stamp, coin, or alcoholic beverage).  This statement could prove helpful to current NFT owners who believe their investment is not covered there.

The Notice also shows the new unique nature of NFTs and how apprehensive the IRS is in making formal rules and regulations without seeking greater input from the general-public.  The IRS is seeking public comments on the following questions:

  1. Does this notice provide an accurate definition of an NFT or are there other definitions of NFTs that should be used in future guidance?
  2. With respect to the look-through analysis—
    • a) Are there instances in which there are concerns with applying the analysis and in which an alternate analysis may be more appropriate?
    • b) What burdens does the analysis impose?
    • c) How might the analysis be applied to an NFT with more than one associated right or asset (for example, if one of the associated rights or assets of an NFT is a section 408(m) collectible but another one is not a section 408(m) collectible)?
    • d) How might the potential for the owner of an NFT to receive additional rights or assets (such as additional NFTs) due to ownership of the NFT (even in the absence of a specific contractual right under the NFT) be treated?
  3. Are there other factors to consider when determining whether an NFT is a section 408(m) collectible? For example –
    • a) What factors might be considered to determine whether a digital file constitutes a “work of art” under section 408(m)(2)(A)?
    • b) What factors might be used to determine whether an asset is “tangible personal property” under section 408(m)(2)(F), particularly in the context of digital files?
    • c) What factors might be relevant if the NFT’s associated right is less than full ownership of an asset (for example, if the associated right is simply personal use of a digital file)?
  4. Does the application of section 408(m) to an individually directed account under a qualified plan raise any issues other than those raised for individual retirement accounts?
  5. What other guidance relating to NFTs would be helpful?

Comments may be submitted electronically via the Federal eRulemaking Portal at (type “Notice 2023-27” in the search field on the home page to find this notice and submit comments).

What Should You do If You Own an NFT in Your IRA or 401(k)?

Notice 2023-27 is mostly drafted as a request for comment and does not describe an effective date. However, if you own an NFT in a Self-Directed IRA or Solo 401(k) plan, the fist thing you should do is analyze whether the underlying asset is an asset described in IRC Section 408; if so, the NFT is likely treated as a collectible. On the other hand, if the underlying asset of the NFT is not listed, such as real estate or a utility token, the next step is to wait for further IRS guidance based on public comments received.

Of course, always speak to a professional before making any investment with your retirement plan. We can’t stress this enough, especially when there’s no official guidance from the IRS. NFTs are still in its infancy, so there is not much to go on yet. As a general rule, it’s probably a good idea to avoid any investment that may be deemed a prohibited transaction.


Notice 2023-27 is the first step the IRS is taking to try to determine what type of NFTs should be treated as a collectable pursuant to IRC Section 408(m).  The stakes are high as a collectible carries a higher capital gains tax rate and is a prohibited investment for Self-Directed IRA and Solo 401(k) plan investors.  The IRS is taking a thoughtful approach to addressing the NFT tax treatment issue and is clearly looking for public assistance to attempt to develop precise and pragmatic rules.

In addition, the Notice’s introduction to the “look-though” rule test provides insight as to how the IRS will likely analyze a specific NFT asset to determine its tax treatment.  It can also be viewed as insight as to how the IRS will determine whether an investment into a fund that holds NFTs would be deemed a collectible.  For example, the “Plan Asset Look-Through Rules” hold that if an investment fund is owned less than 25% by retirement accounts, the retirement account is not deemed to own the fund’s assets directly, which would mean that the retirement account could invest in an NFT fund without being deemed to own the NFT collectable directly.

In sum, Notice 2023-27 is an important first step for the IRS to come up with clear and realistic rules on how a specific NFT asset should be treated for tax purposes.


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