While Self-Managed Super Fund (SMSF) investors have traditionally stuck to investing in the four most popular asset classes (shares, property, trusts, and cash and term deposits), cryptocurrency is slowly but surely starting to make an appearance on that list of asset classes.
In 2021, the Australian Tax Office (ATO) reported that SMSF investors currently have an estimated $212 million invested in cryptocurrencies. When it was first listed as an asset class in June 2019, there was an estimated $190 million invested – so the number is steadily climbing.
And with Aussie investors increasingly looking for more ways to diversify their portfolios, the interest will likely keep growing.
However, as with any investment strategy, you need to weigh up all the pros and cons of using your self-managed super fund to invest in cryptocurrency.
So, to help you navigate this decision, here are six things you need to know about SMSF investment in cryptocurrencies.
Before delving into the considerations that you need to factor into your decision to invest in cryptocurrencies with your SMSF, you need to have a basic understanding of how each one works.
Cryptocurrencies share many of the same characteristics as traditional money, but they exist in digital form. The primary difference between them and traditional money is their decentralisation, which essentially means that there are no political or geographical borders involved. With no third party or central bank, users transact directly with one another.
Once you’ve purchased your cryptocurrency, you store the asset in your own personal wallet.
Now that the ATO has recognised cryptocurrency as an asset class for tax purposes, SMSFs now offer investors the opportunity to invest a portion of their retirement savings into cryptocurrency.
Self-managed super funds allow individuals to take charge of their retirement savings by managing all aspects from the investment strategy and the level of risk you’re willing to take on to the asset classes you invest in – hence why you can now invest in cryptocurrency.
However, if you have not yet established an SMSF, it’s worth your while to familiarise yourself with the complex laws and regulations surrounding setting up and managing an SMSF. We strongly recommend that you seek professional advice from an accountant who specialises in navigating, setting up and maintaining an SMSF.
- 1 6 Things to Know About Self Managed Super Fund Cryptocurrency Investments
- 1.1 The ATO Doesn’t Recognise Cryptocurrency as a Cash Investment For Capital Gains Tax Purposes
- 1.2 Your Investment Strategy and Trust Deed Must Allow For Investment in Crypto Assets
- 1.3 Your Investments Must Meet the Sole Purpose Test
- 1.4 SMSF Auditors Need Identify Trading History
- 1.5 SMSFs Can’t Acquire Cryptocurrency From a Related Party
- 1.6 You Must Meet the Annual Valuation Requirements
- 2 Key Takeaways
6 Things to Know About Self Managed Super Fund Cryptocurrency Investments
Now that you have a basic understanding of how it works to invest with your SMSF, here are 6 things to know about using your self managed super fund to invest in cryptocurrency.
The ATO Doesn’t Recognise Cryptocurrency as a Cash Investment For Capital Gains Tax Purposes
For tax purposes, the ATO doesn’t recognise cryptocurrency as a cash investment and instead classifies it as a CGT (capital gains tax) Asset. So, there are several tax considerations you need to factor into your decision to invest, including:
- your investment will trigger CGT should you make a profit on the sale (capital gains tax event) of your cryptocurrency (at a rate of 10%), and
- the expenses related to your investment is not classified as a tax deduction (unless you are a crypto trader).
For more on the tax consequences of investing in crypto, make sure to check out our guide on how tax on cryptocurrency works.
However, the same super and tax laws will apply once the SMSF members reach the pension phase. In other words, if the SMSF sells its cryptocurrency during the pension phase, it will be exempt from paying CGT.
Your Investment Strategy and Trust Deed Must Allow For Investment in Crypto Assets
So, because cryptocurrency is considered an asset, the SMSF trustee must ensure that the fund’s trust deed and investment strategy document allows the SMSF to invest in digital assets.
Fortunately, if your fund’s trust deed already contains a clause that allows you to invest in assets approved by the Superannuation Industry (Supervision) Act 1993 (SISA) and regulations in the Superannuation Industry (Supervision) Regulations 1994 (SISR), then you won’t have to make any amendments. However, if your trust deed doesn’t contain this general investment clause, you’ll need to make the necessary amendments.
The fund’s investment strategy must also detail the risks and liquidity considerations associated with the SMSF’s cryptocurrency investments.
Your Investments Must Meet the Sole Purpose Test
With any investment that your SMSF undertakes, including cryptocurrency investments, you must ensure that it satisfies the sole purpose test. This entails ensuring that the investment is made for the sole purpose of providing retirement benefits for its members.
Another consideration relating to the sole purpose test is that trustees must be sure to keep the SMSFs crypto assets separate from a member’s personal assets. If the investments intertwine, the ATO will consider this a breach of the sole purpose test.
So, if the members are also investing in cryptocurrency in their personal capacities, the SMSF must have a completely separate digital wallet from the fund members personal digital wallets.
SMSF Auditors Need Identify Trading History
SMSF trustees need to ensure that when it comes time to undertake an SMSF audit, that the auditors can identify the trading history for the SMSFs crypto wallet.
The virtual wallets are uniquely identifiable yet do not detail the transactions that relate specifically to the SMSF. So it may be easier for the SMSF trustee to set up a completely different bank account so that the auditor can easily trace payments and match up the transactions to the fund’s bank account. This way, the auditor can clearly identify that the transactions were solely made for the benefit of the fund.
SMSFs Can’t Acquire Cryptocurrency From a Related Party
According to the regulations under the SIS Act, SMSFs can’t acquire any assets from related parties such as members, trustees, relatives of members and trustees and companies or unit trusts controlled by members or trustees. This is to ensure that all SMSF transactions are conducted on an arms-length basis.
The same rules apply to acquiring cryptocurrency. So, related parties aren’t permitted to sell or gift their personal crypto investments to the SMSF – the fund can only acquire cryptocurrency from unrelated third parties.
You Must Meet the Annual Valuation Requirements
In terms of the valuation regulations for self-managed super funds, all assets held by the fund must be regularly valued to reflect its current market value. However, this can get a bit tricky with cryptocurrencies because the value changes quite significantly on a daily basis.
So, the ATO has confirmed that it is acceptable to value the fund’s cryptocurrency annually. This means that the SMSF trustee must ensure that the cryptocurrency is valued on 30 June each year according to a reputable digital currency exchange such as CoinSpot.
With the cryptocurrency investment space growing exponentially over the last few years, the ATO is definitely clamping down on the rules, regulations and tax obligations surrounding these investments. Couple that with the red tape that comes with using your SMSF as an investment vehicle; there is a lot you need to consider.
We have listed six of the more basic considerations, but this list is not exhaustive. You need to make sure you seek financial advice from an accountant that knows how to navigate both the crypto world and the SMSF world.
Box Advisory Services is a leading accounting and financial advisory firm, providing tax advice and planning to small business owners, SMSFs and cryptocurrency investors, Our team of professionals has extensive experience helping business owners navigate their personal or business investments.
If you have any questions relating to your tax obligations, cryptocurrency or SMSFs, book a free consultation with us today.
Please note that every effort has been made to ensure that information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.