Move over Crypto Currency, there is a new, even harder to understand, “investment” in town. The Non-Fungible Token, or NFT, is even more ethereal than fake money residing in something called a “digital wallet” on a device that is part of a technology called “Block Chain.” Is Crypto actually currency? Not according to the IRS, as they consider it property. This “Seasoned Citizen” will keep my money in a form considered Legal Tender, in a wallet made of leather, until I remove some of it to pay for such frivolous items and food and gasoline.
While I’m not at all sure that I will ever truly understand the concept of the NFT (much less Crypto Currency), I’ll try to break it down and see where that leads. First, what is a Token? According to dictionary.com, a token is something that represents something else, which can be an object, a feeling, or a fact, or it can serve as evidence or proof of ownership.
IRS defines Collectibles to include works of art, antiques, precious metals (with some exceptions), stamps, coins, alcoholic beverages, and other intangibles, as the IRS alone determines. These items have their own rules for taxation and increasingly are not allowed to be held in IRAs. Increasingly, NFTs that are linked to Collectibles are being disallowed, creating an expensive problem for the IRA owner. When an IRA asset is disallowed, the purchase price of that asset becomes immediately taxable as ordinary income. If the market value has fallen, that is no saving grace. The tax bill may become due but with no supporting value. (Taxation without monetization, for loyal Blog readers).
Next, we look at the term fungible, and again from dictionary.com, fungible items can be easily replaced by, or interchanged with, cash, or items of similar value. But NFTs are not truly non-fungible, as they are able to be sold if the owner can find a buyer. Proof of ownership is a valid concept, and that is what an NFT represents.
Crypto was originally touted as being safe and sheltered from thieves, and yet Billions of Dollars’ worth has been stolen ($14 Billion in 2021 alone). However, changing IRS rules worry me more than potential cyber thieves.
If an NFT represents something that can be of benefit to the owner, such as a right to attend a concert or event, exercising that right will trigger the Prohibited Transactions rule for IRAs. Otherwise known as self-dealing, anything other than a hands-off financial relationship with your IRA assets triggers a 100% immediate loss of tax-protected status for the entire IRA. This can result in a large and unexpected tax liability for the owner. (Look for next week’s Blog to discuss this further.)
For now, my money is green, my wallet is black, and my tokens come in the form of stock certificates and bonds registered to me. Those registrations may be done electronically, but they are produced and held by a reputable custodian. Van Wie Financial follows trends, but we understand that our clients appreciate the security of the tried and true. Call us old-fashioned. Please.
Van Wie Financial is fee-only. For a reason.