How can my SMSF hold Cryptocurrency

How can my SMSF hold Cryptocurrency

Besides having greater control over your retirement savings, one of the advantages of an SMSF is that compared to traditional superannuation, you are allowed to have a broad range of assets. These assets include residential and commercial property, cash and term deposits, physical commodities (like gold and silver), collectables, and cryptocurrency.

Over the years, we’ve seen a significant increase in SMSF trustees diversifying their portfolios by investing in cryptocurrency assets such as Bitcoin, Ethereum and Cardano. In fact, the June 2022 quarter data from the Australia Taxation Office showed that $1.37 billion in cryptocurrency assets are held by SMSFs.

As with any type of asset, you should consider the risks of using your SMSF to invest in cryptocurrency. More importantly, you should ensure that you are compliant with the regulations surrounding this type of investment. In this article, we’ll show you how you can hold cryptocurrency in your SMSF and some tips to meet the annual audit requirements.

What are crypto assets?

The ATO defines crypto assets as a “digital representation of value that you can transfer, store, or trade electronically.” They are a subset of digital assets that use cryptography to protect transaction records and transfer of ownership. Cryptocurrencies and tokens (e.g. non-fungible tokens) are examples of crypto assets.

There are already various types of cryptocurrencies – some run on their own blockchain technology while others use an existing platform.

A blockchain is a form of secure digital ledger that is used to store transactions across a peer-to-peer network.

Where are cryptocurrencies stored?

Cryptocurrencies, which are bought and sold on an exchange, are stored in what is called a “crypto wallet”. This digital wallet software allows you to store, send, and receive crypto assets.

You have the option to hold cryptocurrency in a “hot” wallet or “cold” wallet, or a combination of the two. A hot wallet is connected to the internet and is more vulnerable to online attacks but is easier to trade/spend crypto. A cold wallet, on the other hand, is run offline making it more secure but more inconvenient to trade crypto.

These crypto wallets have a public key, which is a cryptographic code (basically the wallet address) that is paired with a private key (which is essentially like a PIN). Anyone can send transactions to the public key, while the private key allows you to unlock and have access to this wallet and use the cryptocurrency.

It is important to remember that information about a fund’s crypto wallet should be documented and securely stored so that it could be passed on to the other trustees or beneficiaries of the SMSF in the event of a member’s death.

How can an SMSF hold crypto assets?

SMSFs are allowed to invest in crypto assets, provided they meet the following conditions:

• Holding crypto assets are allowed under the fund’s trust deed. If this is not the case, trustees of the fund should amend the trust deed to include this type of asset;
• The investment must be in accordance with the fund’s investment strategy;
• And the fund must comply with the same regulatory requirements that apply to other types of investments as per the Superannuation Industry (Supervision) Act or SISA and Super Industry Supervision Regulations (SISR).

Note that based on the super laws, trustees and members must ensure that their fund’s assets are held separately from their personal assets. Therefore, the SMSF should have clear ownership of the crypto assets and be able to provide evidence that the fund has a separate crypto wallet from what is used personally by the trustees and members. In addition, it is not allowed to acquire crypto assets from related parties such as extended family members or companies of trust that are held outside of super.

To know more about common compliance issues of SMSFs holding cryptocurrencies, read our article here.

Cryptocurrency and Tax Classification

Although cryptocurrency has “currency” in its name, it is not a form of money, but it is instead considered by the ATO as a capital gains tax (CGT) asset.

There are no special tax laws for crypto assets, and the tax treatment would depend on how you will acquire, hold and dispose of the asset. Selling Bitcoin at a profit, for example, triggers a CGT event, which would attract capital gains tax, while selling it at a loss will trigger a capital loss.

Trustees of the SMSF should keep appropriate records to calculate capital gains and losses. Cryptocurrency investments should be classified appropriately in the SMSF’s financial statements and annual returns. In the annual return, the said asset should be filed under “other investments” to report the value by the end of the financial year (30 June).

It is important to note that you cannot claim a tax deduction for the costs that are involved in trading cryptocurrency, but instead form part of the cost base of the said asset. If, however, the cryptocurrency is sold during the time when the SMSF member is in the pension phase, the gain will be exempt from any tax consequences.

What are the annual audit requirements for crypto assets?

Just as all assets held in a super fund, cryptocurrencies or crypto assets must be audited each year. In order to pass the annual audit, the following documentation are needed depending on how the cryptocurrency is held:

• Exchange/Broker/Custodial Wallet Holdings
  • Holding confirmation – A holding statement from the exchange as at 30 June of the relevant financial year is required to confirm the holding balance. The document should also confirm that the SMSF is the legal owner of the account.
    If the holding statement from the exchange is not available, a signed declaration confirming the type of currency, units held, market value, exchange used and confirmation that the account is owned legally by the SMSF must be provided.
  • Transaction history – A full-year transaction history for each exchange account is required.

• Direct/Non-exchange/Off-exchange holdings
  • Holding confirmation – The unique wallet address for each holding should be provided to confirm holdings. A reconciliation back to the 30 June balance is also required.
  • Ownership declaration – A signed declaration must be provided on a yearly basis for any wallet not held on an exchange. The declaration should confirm the full wallet address and state that the wallet is owned and wholly/exclusively used by the SMSF
    If the cryptocurrency is held in a cold wallet, the storage location of the device should be stated in the declaration.
  • Transaction history – The wallet address should show the full transaction history.

More questions about your SMSF holding cryptocurrency?

While potential returns for investing in cryptocurrency could be persuading, keep in mind that it is very high risk. We encourage you to take due diligence, particularly taking into consideration the investment strategy of the fund.

If you are considering having your SMSF invest in cryptocurrency, our SMSF Accountants who are well-experienced with digital assets will be more than happy to guide you and answer your questions. Contact us today.