SMSF and Cryptocurrency

Cryptocurrency SMSF (Self Managed Super Fund): Navigating Crypto Investments

SMSF Cryptocurrency Investment

We do not cover the various types of Cryptocurrencies available as it is beyond the scope of this paper.

Cryptocurrency is risky. Can your SMSF own Cryptocurrency? Should your SMSF own Cryptocurrency? Does my SMSF trust deed allow my SMSF to own Cryptocurrency?

The answers are respectively yes, possibly and possibly.

Apart from the risk factor a major consideration is compliance with the superannuation legislation.

Let’s talk about the good, the bad and the downright ugly.

What is Cryptocurrency?

The ATO have determined It is not cash. It is a digital encrypted, and decentralized medium of exchange. A digital wallet stores the public and private keys (address) which enable the receipt and spending of the Cryptocurrency. The balance of the account and the transactions are recorded in a digital ledger which is automatically updated.

Unlike a bank It is not currently regulated by the Australian government but there is a lot of desire to do this, and Treasury has released a consultation paper in October 2023 on future regulation of crypto-asset service providers and thus regulation is on the horizon.

What storage solutions are recommended for holding crypto in an SMSF?

Crypto is typically stored in a digital wallet for the SMSF which is classified as a hot wallet or a cold wallet. The differential is whether the wallet is connected via the internet which is classified as a hot wallet or alternatively a cold wallet which is not connected via the internet but, instead stored offline and must be connected to a physical device (often called a hardware wallet or cold storage) before the owner can send or sign transactions. A custodial wallet is usually a centralized digital currency exchange where your private key is stored on another party’s server. A non-custodial wallet is a private key which is held individually and not on somebody else’s server. A hot or cold wallet can be either custodial or non-custodial but a cold wallet is usually non-custodial.

Can my SMSF invest in Cryptocurrency?

This is the good bit. Yes, an SMSF can hold Cryptocurrency as an investment. Superannuation legislation does not prohibit an SMSF from holding it. However, an SMSF investing in Cryptocurrency must comply with a number of super rules which at “Compliance with the Superannuation Legislation and Audit Requirements”.

Do I need to include Crypto in my SMSF Investment Strategy?

Yes. The Fund’s investment strategy is required to be reviewed and updated. The investment strategy should be updated to acknowledge the risk of the investment and why the trustees consider the risk as reasonable based on the members’ risk profile and the circumstances of the Fund. Diversification is key when the Fund has a high-risk investment. The risk increases when a significant proportion of the Fund’s assets are invested into Cryptocurrency.

This might be considered the bad bit as the Fund’s investment strategy is often overlooked. The spotlight is on the investment strategy which can be critical as part of the evidence the auditor gathers to sign off on the audit report with a clean bill of health.

Contact your SMSF Accountant or Licensed Financial Adviser to assist you with the process. Your adviser can help to ensure compliance with the super rules but unless they are licensed will be unable to give you advice about the underlying investment.

Does my SMSF Trust Deed allow for Investment into Cryptocurrency?

READ your trust deed to find out. Many trust deeds, especially older ones, do not specifically allow an SMSF to invest into Cryptocurrency. However, a trust deed will often include a general catch all phrase which allows the SMSF to invest in “any other asset permitted by SISA & SISR”. Provided your SMSF’s trust deed includes a specific or general investment clause and doesn’t otherwise prohibit the investment then the SMSF is not prohibited from making an investment into Cryptocurrency.

Can my SMSF purchase Cryptocurrency from a member of the Fund?

No. The Superannuation Legislation specifically prohibits an SMSF from acquiring an asset from a member or a related party (including a relative) unless it comes under one of the few exemptions. The ATO has ruled that Cryptocurrency is not one of the exemptions.

What are the Tax Consequences of Holding Cryptocurrency in an SMSF Account?

Crypto is subject to capital gains. Thus, any losses are quarantined against capital gains and cannot be used to offset against ordinary taxable income of the SMSF. Any costs associated with acquiring or trading the asset will be directed towards the cost base and not immediately tax deductible.

The tax rate of 15 percent applies but capital gains can be reduced to 10 percent if the Cryptocurrency is held for more than 12 months or up to 100 percent tax free if the SMSF is in total pension mode when it is sold.

Risks and Consideration When Investing in Crypto with Your SMSF

Apart from the investment risk there are other risks such as:

  • Compliance breaches which are discussed below.
  • Death, marriage breakdown and loss of capacity– ensure the private key and password to access the wallet is stored safely and is accessible. Otherwise, the investment could be lost if a trustee dies, or some other event happens. The Fund should document how and where the wallet details have been securely stored.
  • Scams -Phishing scams are on the rise and can be challenging to detect. Often using a cold wallet where the wallet is not connected to the internet and the key is stored offline is more secure but is harder to access and use. A hot wallet is connected to the internet and has a higher risk of malfunction and being hacked but is a lot more user friendly. Whilst a wallet can be at risk of scammers the encryption and two-factor authentication certainly lower the risk of this happening.                  

Record-Keeping and Reporting Requirements for Crypto Investments by SMSFs

This is the ugly bit. The Fund’s tax return includes a separate spot identifying any Cryptocurrency owned by an SMSF. This is a red flag for the auditor and the ATO.

Auditors need to confirm the existence, the legal ownership and valuation of the asset as at 30 June as well as ensuring the SMSF has complied with other important Superannuation Rules and Regulations.

  1. An auditor can verify existence and ownership of each wallet and each type of Crypto held within a cold or hot wallet or through an exchange or custodial wallet with the following documentation:
  • wallet ID
  • a full year transaction history
  • a holding statement or signed trustee declaration showing the balance as at 30 June
  • any trustee declaration must confirm the wallet is used and owned wholly and exclusively by the SMSF and if a cold wallet it must state the location of the device and it is securely stored
  • provide a copy of the paperwork requesting the application to acquire the crypto to show the SMSF is the purchaser
  1.  Valuation of the crypto assets can be confirmed with the following:
  • market valuation in $Aus at 30 June
  • confirm price via Crypto price website
  • copy of receipts/invoices or a transaction listing or check receipts/payments to the Fund’s bank statement                                                     

Other significant compliance issues are as follows:

Sole purpose test – ensure the genuine reason for having the investment is to grow the members’ retirement savings and not because you simply want to dabble in this risky but potentially very profitable investment. Having an updated investment strategy showing the reasons for the risky investment is very helpful and ensuring all investments are made at arms length and are in the trustee’s name on account of the fund.

Investment Strategy – update the Fund’s investment strategy for the crypto investment and provide the trustees reasoning to acquire this type of investment and how it meets the objective of the members and the Fund.

Separation of assets – it is critical to verify the title is in the name of the Trustee on account of the fund. If the title of the wallet is in individual names and the trustees of the Fund are the same individuals it is very difficult to verify if the wallet is owned by the Fund.

Prohibition on acquiring assets from members or related parties – do not transfer a wallet from a member, relative or other related party to the fund. Provide a signed declaration to confirm that no cryptocurrency was purchased from a member or related party of the Fund.

Charge over the assets – do not allow the wallet to be security for another asset as it is prohibited.

Pensions -must be paid in cash and not cyrpto.

Frequently Asked Questions

Some frequently asked questions are briefly discussed below.  The responses are guidelines only and you should discuss the following with your SMSF Accountant or licensed financial adviser to avoid legal and compliance issues.

How can an Australian include cryptocurrencies like Bitcoin in their SMSF investment strategy?

Investments in Crypto, such as Bitcoin, can be added to the SMSF’s investment strategy by drafting and adopting a Trustee minute or resolution showing the details of the investment decisions and how the SMSF needs and the fund members needs and objectives are being met.  The SMSF trustee should also consider updating the original investment strategy.

What are the ATO guidelines for investing in cryptocurrencies through an SMSF?

The Australian Taxation Office guidelines for SMSF investors include three basic requirements.

  • The fund’s trust deed must allow for the investment in crypto with your SMSF.
  •  The super fund must ensure the cryptocurrency investment complies with the Superannuation Industry rules and regulations such as those discussed above at “Record-Keeping and Reporting Requirements for Crypto Investments by SMSFs”.
  • The crypto investment must be in accordance with the fund’s investment strategy and ensure the SMSF objectives are met.

How does investing in crypto assets align with the sole purpose test of an SMSF?

A SMSF trustee can include crypto in the SMSF portfolio as part of a strategy to diversify the SMSFs investments. It is possible to get exposure to cryptocurrency where the crypto assets are held legitimately for the purpose of providing retirement benefits for members.  An example where the crypto assets held are unlikely to align with the sole purpose test is having a high percentage of the fund’s investment portfolio in cryptocurrency, especially when the members are at retirement or nearing retirement age.  Under these circumstances it is very difficult to reasonably argue that a prudent trustee would invest nearly all of the fund’s assets into one very volatile basket just at the time the members are likely to start accessing their superannuation balances.  

The Australian Taxation Office are also particularly concerned when a member or trustee obtain a fee or commission from using the SMSF assets to personally financially benefit themselves.

How can an SMSF effectively integrate Bitcoin and other cryptocurrencies into its portfolio?

It is critical to ensure crypto assets are held and managed separately from personal assets.  Verification that the SMSF has clear ownership is vital.  The SMSF must be able to provide evidence to show the crypto wallet is held in the name of the SMSF.  The documentation when the crypto is first purchased should provide support that the asset is intentionally purchased by the SMSF and not personally by the members or the trustee.  The purchase should be paid directly from the bank account for the SMSF.  

The Key Take Aways

  • An SMSF can invest into Cryptocurrency
  • Update the Fund’s investment strategy
  • Evidence is key
  • Title is critical
  • Check the trust deed
  • Assess Investment Risk
  • Review Compliance Risk
  • Protect, secure and document your private key and password to access your wallet

Do you want to learn more about SMSF and Cryptocurrency ?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF and Cryptocurrency ? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about SMSF and Cryptocurrency ?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Cryptocurrency ? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)