With tax-free compounding and tax-free withdrawals in retirement, a solo 401k is one of the best retirement accounts to hold high-growth assets. You don't pay any taxes when you sell assets in your account (tax-free compounding), and with the Roth solo 401k account, you pay zero taxes on when you withdraw from your account in retirement.
Like cryptocurrencies, NFTs can appreciate in value rapidly. For example, Bored Ape Yacht Club launched in April 2021 at 0.08 Ethereum, which was worth around $200. Just nine months later, each one was worth at least $290,000, an increase of around 145,000%.
If you bought several Bored Apes during the mint, like many people have, you could have made a fortune in a very short amount of time. If you put in $10,000 at launch, you would have turned it into $14.5 million in nine months. And if you purchased those Bored Apes through a solo 401k, you would essentially pay zero capital gains tax.
Per new IRS guidelines released in October 2022, NFTs are now treated as a digital asset, and will not be classified as a collectible. Moving forward into 2023, you can buy NFTs through your solo 401k.
Before these guidelines were released, it was still risky to hold NFTs in a retirement account like a solo 401k because:
Now that the IRS has provided clear guidelines on how NFTs will be treated, it's safe to add them to your list of investments within your solo 401k plan.
With a solo 401k, you’re allowed to invest in almost any type of asset class. In fact, the IRS doesn’t even have an official list of allowable investments for a solo 401k. Instead, they only have a short list of things that aren’t allowed.
Prohibited investments include:
Any investments made into these things will get counted as distributions, and you would have to pay early-distribution penalties and taxes. For example, if you purchase a piece of art for $1,000, the IRS would consider that as you making an early withdrawal of $1,000 in order to purchase the art, rather than counting it as an investment.
For cryptocurrencies, the IRS has officially stated that they will be treated as capital assets, and are subject to capital gains tax. With NFTs, however, the IRS has made no official decision on whether they’re an asset class or a collectible.
An NFT stands for Non-Fungible Token. Essentially, it proves ownership of a digital asset like art, music, event tickets, photography, songs, and videos. The most common type of NFT is digital art, and art is classified as a collectible by the IRS.
Examples of NFT sales:
Like art, NFTs are valued at whatever the buyer and seller agree it's worth, and the value usually increases based on rarity and historical significance.
In April 13, 2021, IRS Commissioner Charles Rettig testified before the Senate Finance Committee and stated, "NFTs are essentially collectibles in the crypto world." While this doesn't count as an official IRS decision, it's a peek into the direction they're headed.
However, NFTs can be more than just digital art. We're still early in the development and adoption of NFTs and their use cases in the real world. For now, the majority of NFTs exist as digital art. In the future, we'll likely see more of a transition to real-world utility.
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