Other Assets

Other Assets

"Other assets" is the Series 66's catch-all category for everything that doesn't fit neatly into stocks, bonds, mutual funds, or insurance products. The chapter covers four genuinely distinct asset classes — tangible collectibles (art, wine, coins, antiques, watches), real assets (commodities and precious metals refresh), digital assets (cryptocurrencies and tokens with their evolving regulatory framework), intellectual property (patents, copyrights, trademarks), and foreign currencies / forex speculation. The single most-tested feature is the 28% maximum federal long-term capital gains rate on collectibles — meaningfully higher than the 0/15/20% rates for stocks and bonds. Practical considerations like storage costs, authentication, provenance, and illiquidity also drive suitability questions. This chapter develops each area with worked tax examples.

Commodities and Precious Metals

Commodities (oil, agricultural products, metals) can be accessed through futures contracts, commodity ETFs, or commodity pools. They often serve as an inflation hedge and have low correlation with traditional assets, providing diversification benefits.

Precious metals (gold, silver) have historically been considered safe-haven assets and inflation hedges. Investors can access them through physical ownership, ETFs, mining stocks, or futures.

Digital Assets — Regulatory Framework

The SEC's approach to digital assets centers on the Howey Test, established by the Supreme Court in SEC v. W.J. Howey Co. (1946). An asset is a security if it involves:

1. An investment of money
2. In a common enterprise
3. With an expectation of profits
4. Derived primarily from the efforts of others

If all four elements are present, the digital asset is a security and must comply with federal securities laws (registration, disclosure, broker-dealer/exchange registration).

Key distinctions for the exam:

• Bitcoin and sufficiently decentralized assets: The SEC has generally not classified Bitcoin as a security (no identifiable "efforts of others" driving returns)
• ICOs and many tokens: Frequently classified as securities — investors buy tokens expecting developers to build a platform that increases the token's value
• Stablecoins: Regulatory classification varies depending on structure

Collectibles — what counts as a "collectible" under the tax code?

The IRS provides a specific statutory definition of "collectibles" under IRC §408(m). This matters because collectibles get DIFFERENT tax treatment than ordinary capital assets: a maximum federal long-term capital gains rate of 28% rather than the 0/15/20% rates that apply to most other long-term gains. The statutory list of collectibles:

• Works of art — paintings, sculptures, prints, photographs, drawings.
• Rugs and antiques — including most pre-1900 furniture and decorative items.
• Precious metals — gold, silver, platinum, palladium (with limited exceptions for certain US coins and bullion held by IRA custodians).
• Gems — diamonds, emeralds, rubies, sapphires.
• Stamps and coins — with limited exceptions for certain US-minted coins.
• Alcoholic beverages — particularly fine wine and rare spirits held as investments.
• Other tangible personal property — classic cars, watches, sports memorabilia, manuscripts, musical instruments, vintage musical equipment.

The 28% maximum rate applies regardless of whether the investor's ordinary income tax bracket would otherwise put them in the 15% or 20% LTCG bracket — collectibles do NOT get the preferential 0%/15% rates available to lower-bracket taxpayers on stock gains. This creates a meaningful tax drag that the Series 66 expects you to recognize.

The major collectibles categories — what investors actually buy

Practical considerations — what makes collectibles different

Beyond the tax treatment, collectibles have several practical features that drive suitability analysis:

• No income generation. Collectibles produce no dividends, interest, or rent. Return comes entirely from price appreciation. This is a major disadvantage compared to traditional investments.
• High transaction costs. Auction commissions can run 25-30% combined (buyer's premium + seller's commission). Private sales involve dealer markups of 20-40%. A collectible must appreciate substantially just to break even after costs.
• Authentication and provenance. Forgeries are common in art, watches, and wine. Provenance (chain of ownership history) significantly affects value. A questionable attribution can render a $1M painting worth $100K or less.
• Storage and insurance. Climate-controlled storage, fine art insurance (1-3% of value annually), security systems. For wine, professional cellaring services run $10-30 per case per year. For watches and jewelry, secure storage and specialized insurance add 1-2% annually.
• Illiquidity. Selling typically requires consigning to an auction house (waiting months for the right sale) or accepting a steep discount from a dealer. There's no daily mark-to-market.
• Concentration risk. Each collectible is unique; portfolio diversification within a collectible category is difficult and expensive.

The Series 66 expects you to recognize that collectibles are generally appropriate only for sophisticated, high-net-worth investors who can absorb the illiquidity, transaction costs, and authentication risks — and who have specific interest or expertise in the collectible category beyond pure financial return motivation.

Collectibles tax treatment — the 28% rate explained

The Internal Revenue Code applies a special tax regime to collectibles under §408(m). Key features:

• Long-term gain (held >1 year): Maximum federal rate is 28%. The actual rate is the LOWER of 28% or the taxpayer's ordinary income marginal rate. So a taxpayer in the 22% bracket pays 22%; a taxpayer in the 32% or 35% bracket pays 28% (capped).
• Short-term gain (held ≤1 year): Taxed as ordinary income at the taxpayer's full marginal rate — same as short-term capital gains generally.
• Losses: Subject to the same $3,000 annual deduction limit (against ordinary income) as other capital losses. Personal-use losses on collectibles are NOT deductible — only investment-purpose collectibles produce deductible losses.
• Net Investment Income Tax (NIIT): An additional 3.8% tax applies to high-income taxpayers' net investment income, including collectibles gains. Combined with the 28% federal rate, the top federal rate on collectibles gains is effectively 31.8%.
• State taxes: Add on top — California adds up to 13.3%, New York up to 10.9%, etc.

Collectibles and retirement accounts — the IRA prohibition

Internal Revenue Code §408(m) generally PROHIBITS IRAs and qualified plans (401(k)s, pensions) from holding collectibles. A retirement-account purchase of a collectible is treated as a DISTRIBUTION equal to the cost of the collectible — triggering immediate ordinary income tax and (if under 59½) the 10% early-withdrawal penalty.

Limited exceptions:

• Certain US-minted gold, silver, platinum, and palladium coins (American Eagles, American Buffalos, American Silver Eagles) are NOT classified as collectibles for IRA purposes and can be held in IRAs.
• Bullion meeting specific purity standards (99.5%+ for gold, 99.9% for silver) can be held in IRAs, but only if held by an IRA-approved trustee — not personally by the account owner.
• Foreign coins generally are classified as collectibles and CANNOT be held in IRAs, even gold coins (Canadian Maple Leaf, Krugerrand are generally excluded).

The exam takeaway: a client who buys a fine wine collection or art portfolio inside a self-directed IRA hasn't found a tax loophole — they've created an immediate taxable distribution and may have triggered the 10% penalty. The IRA cannot serve as a tax shelter for collectibles. The IRS audits this aggressively because the prohibition is structural and the consequences are severe.

Digital assets — baseline definitions

Digital assets include cryptocurrencies, tokens, and other blockchain-based assets. Key distinctions for the Series 66:

• Securities vs. non-securities: Whether a digital asset is a security depends on the Howey Test — an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others.
• Currencies: Some digital assets function primarily as mediums of exchange (e.g., Bitcoin) and are classified as commodities under CFTC jurisdiction.
• Risks: Extreme volatility, regulatory uncertainty, cybersecurity risk, lack of FDIC/SIPC insurance protections, liquidity risk for smaller tokens.
• Digital assets classified as securities must comply with federal securities laws including registration, disclosure, and broker-dealer/exchange registration requirements.

Digital assets — the regulatory framework deeper

The Series 66 tests the regulatory classification of digital assets more than their technical or investment features. The framework rests on several pillars:

• SEC jurisdiction via the Howey Test. A digital asset is a security under §2(a)(1) of the Securities Act of 1933 if it qualifies as an "investment contract" under the four-prong Howey Test (next block). The vast majority of ICO tokens have been treated as securities. Tokens classified as securities must be registered with the SEC (or rely on an exemption like Reg D or Reg A+) and traded only on registered exchanges.
• CFTC jurisdiction over crypto commodities. The CFTC has classified Bitcoin and Ether as commodities (not securities), giving the CFTC jurisdiction over crypto FUTURES markets. CFTC oversight applies to the futures and derivatives markets, not the spot crypto markets directly.
• FinCEN as money services businesses. Crypto exchanges, wallet providers, and certain intermediaries must register as Money Services Businesses (MSBs) and comply with anti-money-laundering (AML) and Know-Your-Customer (KYC) rules under the Bank Secrecy Act.
• IRS as property. For tax purposes, the IRS treats cryptocurrencies as property, not currency. Every sale, exchange, or use is a taxable event with gain or loss calculated based on cost basis.
• State money-transmission laws. Most states require crypto exchanges to obtain money-transmitter licenses on top of federal MSB registration.

The fragmented multi-agency framework is itself a Series 66 testable concept — no single regulator has comprehensive jurisdiction, which creates ongoing uncertainty and enforcement gaps.

The Howey Test — the four prongs that define a security

The Howey Test, from the Supreme Court's 1946 decision in SEC v. W.J. Howey Co., defines an "investment contract" (and therefore a security) as an arrangement with all four of the following elements:

The "efforts of others" prong is where SEC enforcement focuses for cryptocurrency: a token that depends on a development team's continued work is more likely a security; a token whose network has become "sufficiently decentralized" may have evolved out of security status (the SEC has discussed but not formally adopted this concept). Bitcoin, with no central development team and no ongoing promoter, has consistently been treated as a non-security commodity. The "Hinman speech" of 2018 explicitly argued Ethereum had become sufficiently decentralized to not be a security — though SEC leadership later distanced itself from this analysis. The test remains case-by-case, evolving, and contested.

Stablecoins — a special category

Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to the US dollar (1 stablecoin = $1). Major examples: USDT (Tether), USDC (Circle), DAI (MakerDAO). They're used to move value between exchanges, hold cash positions, and participate in decentralized finance (DeFi). Three structural types:

• Fiat-collateralized. Backed by US dollar reserves or short-term Treasury bills held in regulated custody. USDC and USDT are the major examples. Maintain the peg through 1:1 redemption with the issuer. Regulatory focus has been on reserve composition and transparency.
• Crypto-collateralized. Backed by other cryptocurrencies held as overcollateralization (often 150-200% of the stablecoin value). DAI is the major example. The overcollateralization absorbs volatility in the underlying crypto.
• Algorithmic. Maintain the peg through algorithmic supply adjustments rather than collateral. TerraUSD (UST) was the major example until its catastrophic depeg in May 2022 wiped out roughly $40 billion. Algorithmic stablecoins are now widely regarded as fragile and unsuitable for retail.

Regulatory classification of stablecoins remains contested. The Treasury's President's Working Group on Financial Markets has recommended that stablecoin issuers be regulated like insured depository institutions (banks). The SEC has argued some stablecoins are securities; the CFTC has argued some are commodities; Congress has not yet acted. The classification matters because it determines licensing requirements, capital rules, and consumer protections.

Intellectual property as an asset class

Intellectual property (IP) is increasingly bought, sold, and securitized as an investment asset. The major IP categories:

• Patents. Exclusive rights to use, make, or sell an invention for 20 years from filing. Investors buy patent portfolios from inventors or distressed companies and license them to operating companies. Specialized firms ("non-practicing entities" or "patent assertion entities") have built significant businesses on patent licensing and enforcement.
• Copyrights. Exclusive rights to reproduce, distribute, perform, or display creative works. Music catalogs are a particularly active investment category — Hipgnosis and similar funds buy songwriter catalogs (e.g., Bob Dylan, Bruce Springsteen sold catalogs for $300-500M+).
• Trademarks. Brand identifiers. Sometimes traded standalone (especially distressed brands), more often as part of full business acquisitions.
• Trade secrets. Confidential business information (formulas, processes, customer lists). Rarely traded as standalone assets — typically transferred with operating businesses.

The economic feature distinguishing IP from other intangibles is that IP can generate licensing royalties — ongoing income from third parties' use of the protected work. For music catalogs, songwriter royalties from streaming, broadcast, and licensing flow to the catalog owner. Patent licensing similarly generates ongoing revenue. This makes IP one of the few "alternative" asset classes that produces actual cash flows rather than relying solely on appreciation.

IP investment vehicles — how retail and institutional investors access IP

IP is difficult to access for individual retail investors because of high minimums and complexity. Major vehicles:

• Direct purchase. Buying patents, music catalogs, or trademarks directly. Requires sophisticated valuation, due diligence, and ongoing administration. Minimum scale typically $1M+ for any meaningful asset.
• Specialized investment funds. Funds focused on music royalties (Hipgnosis, Mills Music Trust), patent litigation funding, or pharmaceutical IP. Most are private (Reg D, accredited-investor-only) with multi-year lockups. A few have public listings (Hipgnosis traded on the London Stock Exchange before going private).
• Royalty-based investment platforms. Newer platforms (Royalty Exchange, ANote Music) let investors buy fractional shares of song royalty streams. Generally Reg A+ or accredited-investor offerings.
• Patent litigation funding. Funds finance patent infringement lawsuits in exchange for a share of recoveries. High-risk, high-return; binary outcomes per case but portfolio diversification spreads risk.
• Securitization. Some IP-backed bonds (Bowie bonds in 1997 securitized David Bowie's catalog royalties; similar securitizations have been done for pharmaceutical royalties). These are securities, regulated like other asset-backed bonds.

The Series 66 expects you to recognize that IP investments are typically illiquid, complex, and appropriate only for sophisticated investors. They produce cash flows (royalties) but face valuation challenges, legal risks (infringement defenses, validity challenges), and concentration risk. The 28% collectibles rate does NOT apply to IP — gains on IP are typically capital gains at standard 0/15/20% rates if held over a year.

Foreign currencies and forex markets

The foreign exchange (forex or FX) market is the largest financial market in the world, with daily trading volumes of $7+ trillion (vs. $200B for US equities). Currencies are quoted in pairs: EUR/USD = 1.10 means one euro buys $1.10. The first currency is the "base"; the second is the "quote." The major pairs:

• EUR/USD (euro/dollar): The most-traded pair, roughly 25% of global FX volume.
• USD/JPY (dollar/yen): Major Asian pair, sensitive to Japanese monetary policy and US interest rates.
• GBP/USD (pound/dollar, "cable"): Sterling-dollar pair, sensitive to UK and US economic data.
• USD/CHF (dollar/Swiss franc): Safe-haven pair; CHF strengthens during global stress.
• Other majors: USD/CAD, AUD/USD, NZD/USD — commodity-currency pairs tied to commodity prices.

FX trades 24 hours, 5 days a week, across overlapping global sessions (Tokyo → London → New York). The market is decentralized: no single exchange, with most volume going through interbank trading and electronic communication networks (ECNs).

How investors use foreign currencies

Forex serves several distinct investment purposes:

• Currency hedging. US investors with foreign assets (stocks, bonds, real estate) face currency risk. Hedging via forwards, futures, or currency-hedged ETFs eliminates this risk. The cost of hedging is roughly the interest rate differential between the two currencies.
• Carry trade. Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency. The classic example: borrowing Japanese yen at near-zero rates and investing in higher-rate currencies (Australian dollar, Brazilian real). Generates positive carry but exposes the investor to exchange rate risk — if the funding currency strengthens, the trade can lose substantially.
• Speculation. Pure directional bets on currency movements based on macroeconomic analysis (interest rate expectations, growth differentials, current account balances, political events). Retail forex platforms offer high leverage (50:1 to 500:1) and tight spreads, making short-term speculation accessible.
• Diversification. Some investors hold a small currency allocation as portfolio diversification, particularly Swiss franc or gold for safe-haven exposure.

The leverage available in retail forex (50:1+) makes it functionally similar to derivatives trading — small moves in the underlying produce large percentage gains or losses. Forex trading is regulated by the CFTC for futures and the NFA for retail spot trading. The SEC has minimal forex authority because most currency pairs are NOT securities.

Forex risks and suitability

The risk profile of forex trading is distinctive and worth understanding:

• Leverage risk. Retail forex platforms commonly offer 50:1 leverage in the US (much higher abroad). A 2% adverse move on a 50:1 leveraged position wipes out the entire margin. This makes risk management critical and makes forex unsuitable for most retail investors.
• Currency volatility. Major-pair daily moves of 0.5-1.5% are common; emerging-market currencies can move 5-10% in a day on political events. The Swiss National Bank's January 2015 abandonment of the EUR/CHF peg caused a 30% one-day move in CHF, bankrupting many retail traders.
• Spread costs. Even tight spreads of 1-2 pips on major pairs add up with frequent trading. Wider spreads on minor pairs further increase trading costs.
• Counterparty risk. Retail forex platforms aren't centrally cleared. If the broker fails, customer funds may be at risk. Major US brokers are regulated by the CFTC and NFA, providing some protections, but international brokers vary widely in regulatory oversight.
• Tax complexity. Forex gains/losses can fall under either §988 (ordinary income, default for cash forex) or §1256 (60% long-term / 40% short-term, for regulated futures) depending on the contract type and the trader's election. The wrong election can result in a 10-15 percentage point tax differential.

The Series 66 expects you to recognize that retail forex is GENERALLY UNSUITABLE for ordinary retail investors due to high leverage and complexity. Forex exposure for diversification purposes can usually be obtained more appropriately through currency-hedged international funds or through ETFs that specifically track currency baskets.

Commodities investment methods — comparison