How do I stake Crypto in my SMSF?
Staking Crypto is a means for a self-managed super fund (SMSF) to earn income whilst passively holding cryptocurrency. It is similar to earning interest on a bank deposit but unlike bank interest it is not automatic.
What is Crypto Staking?
Cryptocurrency transactions are recorded and organised into blocks, which are subsequently linked in a chain which cannot be changed or altered. These transactions remain public and decentralised; however, digital wallets provide privacy for users, as only the wallet holder can access their unique digital address.
“Proof of Stake (PoS)” refers to a method of verifying cryptocurrency transactions wherein coin holders elect to “stake” their assets. Staking entails locking a specified quantity of digital coins within the network, in exchange for additional tokens as rewards. During the staking period, these coins are inaccessible for other purposes, such as sale or transfer. SMSFs may earn rewards by contributing to blockchain security and transaction validation through staking. It is one of many ways an SMSF can invest in Cryptocurrency.
The blockchain system selects a holder at random to update the ledger, resembling a lottery system; consequently, holding more coins increases the likelihood of selection. PoS is recognised for its efficiency, reduced energy consumption, and broader participation opportunities compared to “Proof of Work (PoW),” the original transaction verification model. PoW necessitates significant computing power and complex calculations, thereby limiting participants. While PoW remains fundamental for Bitcoin, PoS is increasingly popular. Both models use a consensus mechanism whereby a group reaches an agreement about the crypto transactions.
Example – reward for staking crypto currency
Tony’s SMSF wants to earn additional income using the fund’s cryptocurrency using a particular network. The network has a total of 3,500 tokens in circulations. Tony’s SMSF acquires 600 tokens and decides to stake 100%. The fund has a 17% chance of being selected to earn rewards for staking the fund’s tokens.
Steps required for an SMSF to stake Crypto
- Review the fund’s investment strategy and trust deed to confirm that staking cryptocurrency is permitted and aligns with the sole purpose of providing retirement benefits to members. It is also essential to ensure compliance with other SIS requirements, such as securing fund assets and holding legal title in the name of the fund.
- Choose a cryptocurrency that supports “proof of stake (PoS)”.
- Purchase the cryptocurrency in the super fund name from a reputable crypto platform which is registered with AUSTRAC
- Select a suitable staking platform which can be the same crypto platform used for the original crypto purchase. Evaluate whether tokens will be stored in custodial or non-custodial wallets. The wallet must be registered in the fund’s legal name to ensure compliance with SIS requirements.
- Delegate tokens directly to a validator or a forger who is responsible for validating transactions on the blockchain and creating new blocks. Since digital tokens remain in the SMSF’s wallet this process avoids the risk of transferring the assets to a member or other related party, ensuring compliance with SIS legislation.
- Carefully consider any associated costs, such as staking commissions, which are generally calculated as a percentage of the rewards earned.
- When terminating staking, be aware of possible unbonding delays, which may affect timely access to tokens for several days.
How are newly acquired tokens from crypto staking valued?
When tokens are earned as rewards for staking, they should be recorded at their market value at the time they are received. An SMSF auditor will require external documentation proving both the acquisition date and the valuation of the new tokens. It is essential to have records of staking transactions available to present to the auditor, confirming when the new tokens were obtained.
How are staking rewards taxed?
Similar to a dividend reinvestment scheme the income received is taxable and the new tokens are included as an asset in the fund’s financial statements. The SMSF will be taxed on the fair market value of the rewards received from staking. When the tokens are sold, they are subject to SMSF capital gains tax.
Dealing in cryptocurrencies can be complex and when considering using staking to earn additional income for your SMSF you should seek professional advice. It is crucial an SMSF retains legal title and control over its tokens at all times.