What is Fair Market Valuation (FMV) and why it matters
Every year, the Internal Revenue Service requires your IRA's assets to be reported at fair market value. For publicly traded assets, this is automatic. For alternative assets — real estate, private equity, promissory notes, LLCs — the account holder is responsible for providing the valuation, and Digital Trust, the custodian for your account, files what you provide.
Steps / Explanation
Fair Market Valuation (FMV) is the estimated value of an IRA asset as determined by an independent third party — the price at which the asset would change hands between a willing buyer and a willing seller, neither being required to act. The Internal Revenue Service (IRS) requires that all IRA assets be reported at fair market value annually. Failure to submit a timely and accurate FMV can result in penalties and reporting issues.
For Self-Directed IRAs holding alternative assets, FMV is one of the most consequential ongoing recordkeeping obligations — and one of the most commonly misunderstood. This article explains what FMV is, why the IRS requires it, and who is responsible for producing it.
Why the IRS requires an annual FMV
The Internal Revenue Service uses your IRA's annual FMV for several specific purposes:
Form 5498 reporting. Each year, your custodian files Form 5498 reporting the December 31 Fair Market Value of your account (Box 5). This is the value of record for the year. See "How Digital Trust reports to the IRS on your behalf".
Required Minimum Distribution (RMD) calculation. For Traditional, SEP, and SIMPLE IRAs subject to RMDs, the RMD amount for a given year is calculated by dividing the prior year's December 31 FMV by an IRS life-expectancy factor. An inaccurate FMV produces an inaccurate RMD — which can trigger a 25% excise tax under SECURE 2.0 (reduced to 10% if corrected within two years). See "Required Minimum Distributions (RMDs) — rules and deadlines".
Distribution-event valuation. When you take an in-kind distribution of an alternative asset, the asset is valued at its FMV on the date of distribution — and that value flows to your Form 1099-R as the taxable amount.
Prohibited-transaction defense. If a transaction in your IRA is ever questioned, contemporaneous FMV documentation is part of the evidence that the IRA transacted at arm's length and not at a self-dealing price.
Estate and beneficiary reporting. When an account passes to a beneficiary, the FMV at date of death is the value for inheritance accounting and the basis from which the beneficiary's own future distributions are measured.
The FMV is not optional. It is a recurring obligation that the IRS expects to see filed on Form 5498 every year for every IRA.
Who is responsible for producing the FMV
Two parties contribute to the FMV reporting flow:
The account holder is responsible for producing or sourcing the FMV — getting an appraisal, broker opinion, sponsor statement, or other supporting documentation that establishes the asset's value.
Digital Trust, as the custodian for your account, is responsible for filing the value you provide on Form 5498 — but Digital Trust does not produce the valuation, does not verify it, and does not have an independent view of what your alternative assets are worth.
This is one of the most important responsibility-splits in the SDIRA model. The custodian's role is reporting; the substantive valuation work sits with the account holder. See "Your recordkeeping responsibilities as an SDIRA holder" for the broader responsibility framework.
We recommend consulting a tax advisor or attorney for guidance specific to your situation.
What counts as a valid FMV source
The IRS does not specify a single approved methodology, but the underlying requirement is that the valuation be:
Independent. Produced by someone other than the account holder or a disqualified person. You cannot "value your own asset" — even if your estimate would be reasonable.
Methodology-based. Tied to a recognized valuation approach — comparable sales, discounted cash flow, recent transaction price, sponsor-stated Net Asset Value (NAV), or a similar method appropriate to the asset class.
Current. Reflecting value as of a specific date close to the December 31 reporting date. A 5-year-old appraisal does not satisfy the annual requirement.
Documented. A written record of the valuation, the methodology, and the source — kept in your records and available if the IRS asks.
Sources commonly accepted by custodians (subject to the asset type):
Real estate: licensed appraiser's appraisal, broker price opinion (BPO), or comparable-sales analysis.
Private equity / private placements: sponsor-issued NAV or capital account statement, fund administrator's report, K-1 capital balance.
Promissory notes: principal balance plus accrued interest, with documentation that the note is performing.
Precious metals: spot price at year-end times stated quantity, from an IRS-approved custodial storage facility.
Cryptocurrency: market closing price at year-end from a recognized exchange.
LLC interests: the LLC's NAV at year-end, supported by the LLC's books or a sponsor statement.
If you're not sure what counts as a valid source for a particular asset, contact the Service Team or a tax advisor before the FMV deadline.
Publicly traded assets — no submission needed
For publicly traded securities (stocks, bonds, exchange-traded funds, mutual funds), Digital Trust, the custodian for your account, obtains the December 31 closing price automatically. You do not need to submit anything. The FMV for these assets is built into the custodian's standard year-end reporting.
The submission process applies specifically to non-publicly-traded assets — the kinds of assets that distinguish a Self-Directed IRA from a conventional brokerage IRA.
What FMV is not
A few common misunderstandings to clear up:
FMV is not a tax-basis calculation. Basis tracking lives on Form 8606 for Traditional IRAs and is a separate exercise. FMV is the current value of the asset; basis is what you paid for it (after-tax money) and is used at distribution time.
FMV is not the asset's potential future value. It is the value as of a specific date — typically December 31 — reflecting market conditions at that time.
FMV does not need to be a precise number. The IRS expects reasonable, methodology-based estimates. For assets where exact valuation is impossible (illiquid private investments, undeveloped land), a defensible estimate based on a recognized approach is acceptable.
FMV is not a Retired.com judgment call. Neither Retired.com nor Digital Trust values your investments. The valuation is your responsibility; Digital Trust files what you provide.
What if FMV is genuinely uncertain
Some alternative assets are hard to value — a stake in a private startup that has not raised additional capital recently, a parcel of land with no recent comparable sales, a defaulted promissory note. The IRS does not require certainty; it requires reasonable effort and methodology-based documentation.
In these cases:
Document the methodology you used and why it was the best available approach.
Note any uncertainty in your supporting records.
If the asset has dropped in value (an impairment), reflect that — overstating FMV is not a way to avoid scrutiny, and an inflated value increases your RMD obligation needlessly.
Engage a qualified appraiser or valuation professional for assets where a defensible number is critical.
We recommend consulting a tax advisor or attorney for guidance specific to your situation, particularly for high-value or unusual assets.
Common questions
Can I just use last year's value?
No. The IRS requires a current-year valuation. Carrying forward a stale value is not compliant — and for assets that have changed in value (especially upward), it may understate your RMD obligation in a way that creates a future penalty.
Does the December 31 value really need to be on December 31?
The reporting date is December 31, but the valuation can be as of a reasonable proximate date — typically within 30 to 60 days of year-end. For assets where year-end statements are routinely produced (K-1s from partnerships, NAV statements from funds), use the closest available date and document the as-of timing.
What if I disagree with the FMV my sponsor or appraiser provided?
You can engage a different appraiser, get a second opinion, or document your basis for disagreement in your records. Digital Trust files what you submit — the substantive disagreement is between you and your valuation professional. We recommend consulting a tax advisor or attorney if a valuation dispute affects an RMD or distribution calculation.
Does Retired.com check whether my FMV is reasonable?
No. Retired.com is not in a position to evaluate alternative-asset valuations, and the custodian model explicitly excludes investment-value judgment. The substantive FMV review sits with you, your tax advisor, and — if it ever comes to that — the IRS.
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