A common question we are asked as accountants is whether Cryptocurrencies, such as Bitcoin or Ethereum can be held as SMSF Assets. Obviously many of these have seen a massive increase in investments over the past few years becoming the new ‘gold’ hedge. With current global economic uncertainty, it isn’t surprising that many SMSF trustees are hedging their traditional investment portfolios with cryptocurrencies to diversify their superannuation savings. While you are permitted to invest in cryptocurrencies via your SMSF, there are a few factors to be mindful of to avoid any potential audit issues.
1. Investment Strategy
When examining SMSF Cryptocurrency holdings we must start with the investment strategy. This strategy is written by yourself as the trustee of the fund and is a legal requirement for every Self Managed Super Fund. The investment strategy is a unique document to your particular fund which outlines how you are planning to run the fund. This is a tailored document which fits your specific investing style, goals and strategies.
When writing your Investment Strategy keep in mind you must meet the rules under the SIS Act and show that you have considered the following factors:
- risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
- composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
- liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
- fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs
- whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF
For more information about how Investment Strategies work checkout the ATO website which has some great content breaking down the legislation.
2. SMSF Cryptocurrency Holdings on the Exchange
All assets of an SMSF are required to be held in the legal name of the Self Managed Super Fund which means showing the name of the fund and it’s corporate trustee on the legal paperwork providing ownership. All SMSF assets must also be maintained completely separately from any personal investment assets. For cryptocurrency assets this means opening a separate wallet which holds only your SMSF holdings which is set up in the name of your Self Managed Super Fund and it should never interact in any way with your personal or business wallets or Crypto holdings.
This can be done on the exchange/trading platform of your choosing provided they can show the wallet in the name of the SMSF. This setup means you are then able to prove to the auditor that the ownership structure has been created correctly and you have met the segregation of assets required under the Superannuation Industry (Supervision) Act 1993.
3. How does the ATO View Crypto Assets?
The view of the Australian Taxation Office is that the cryptocurrency does not count under the legal definition of a ‘listed security’ nor under it’s definition of a ‘currency’. This definition question is important because it means that, unlike normal listed securities, you cannot purchase or transfer crypto from your own holdings directly into the fund or purchase them from a related party.
The Australian Taxation Office still sees SMSF cryptocurrency holdings as a capital asset of the fund in the same way it would treat private company shares or other unlisted assets. The key thing to keep in mind here is that all purchases of Crypto must come from an independent source such as buying them directly on the exchange you have signed up for and not be transferred from an existing personal holding or that of a related party.
The ATO is also watchful for people creating round robin arrangements where you sell some SMSF cryptocurrency holdings to your friend and he in turn buys a similar amount from you personally so it is best to just keep it completely separate and thus beyond suspicion.
4. EOFY Requirements
All Self Managed Super Funds are required to show the valuation of all assets they are holding at the 30th June each year. These values must come from an independent source which can be verified by the ATO for the fund to remain compliant. For SMSF Cryptocurrency holdings the ATO has agreed that the prices shown on any reputable exchange at the 30th June will meet this regulation.
These valuations will then be checked by your SMSF Auditor each year as part of the audit and any discrepancies may result in a failed audit and a qualified report being submitted to the ATO. Your SMSF Accountant will be able to find these valuations on your behalf each year and make sure the fund remains compliant.
5. Tax on SMSF Cryptocurrency Holdings
When trading Crypto in your SMSF keep in mind the Cryptocurrency is considered a CGT (Capital Gains Tax) asset by the ATO as opposed to being considered a currency. This means that any profit or loss you make on buying, selling, trading Cryptocurrency is taxable based on the standard Capital Gains Tax rules for SMSFs.
Generally SMSFs pay tax at 15% on earnings which they are in accumulation phase but assets sold after being held longer than 12 months may be eligible for the Capital Gains Tax discount which is 1/3 in an SMSF (different from the 50% you get personally) which will mean a net tax rate of 10% on the capital gain.
Our SMSF Accountants
If you would like help and support with your SMSF Cryptocurrency holdings please reach out to us and one of our specialist SMSF Accountants will be happy to talk you through how it all works! Our team has had tons of experience with digital assets and can help you navigate the plethora of rules to ensure you remain compliant. Contact us today to learn more about how we can assist you with your Self Managed Super Fund vision.