Cryptocurrency and SMSFs

Cryptocurrency is an exciting but high-risk investment option. If you're considering holding crypto in your Self-Managed Super Fund (SMSF), it's important to understand the rules, risks, and compliance requirements. This guide covers the essentials for SMSF trustees looking to invest in digital currencies.

What Is Cryptocurrency?

• Cryptocurrency is a digital, encrypted, and decentralized medium of exchange. Unlike cash or bank deposits, it is not currently regulated by the Australian government, though regulation is under discussion, with Treasury releasing a consultation paper in October 2023 on crypto-asset service providers.
• Cryptos are stored in digital wallets, which hold public and private keys that allow the receipt and spending of digital assets. Transactions and balances are recorded in a digital ledger that is automatically updated.

Storing Cryptocurrency in an SMSF

• Cryptocurrency in an SMSF is typically stored in either hot wallets or cold wallets:

  • Hot Wallets: Connected to the internet, making them easier to access but more vulnerable to hacks.
  • Cold Wallets: Offline storage, often hardware devices, which are more secure but less convenient to access.

• Wallets can also be custodial (held on a third-party platform) or non-custodial (private keys held by the SMSF). Cold wallets are usually non-custodial for enhanced security.

Can My SMSF Invest in Cryptocurrency?

• Yes, SMSFs can hold cryptocurrency as an investment. Superannuation legislation does not prohibit it. However, trustees must ensure their SMSF:

  • Updates its investment strategy to reflect the risks associated with cryptocurrency.
  • Considers diversification to reduce risk, especially if crypto is a significant portion of the fund's assets.
  • Complies with all trust deed provisions and superannuation regulations.

Trust Deed Considerations

• Your SMSF trust deed must allow investments in cryptocurrency. Older deeds may not mention crypto specifically but often include broad clauses permitting investments in "any asset allowed under SISA & SISR." If your deed has such a clause and does not prohibit crypto, the SMSF may proceed.

Restrictions on Acquiring Crypto

• SMSFs cannot purchase cryptocurrency from members or related parties, as this is prohibited under superannuation law.
• All crypto investments must be made at arm's length and paid for directly from the SMSF bank account.

Tax Implications

• Cryptocurrency is subject to capital gains tax (CGT). Key points:

  • Losses can only offset capital gains, not ordinary income.
  • Acquisition and trading costs form part of the cost base.
  • SMSF tax rate is 15%, but gains can reduce to 10% if held over 12 months, or be tax-free if the fund is in pension phase.

Risks to Consider

• Beyond market volatility, trustees must consider:

  • Compliance breaches: Ensure all regulations are followed.
  • Loss of access: Securely store private keys and passwords to prevent loss due to death, incapacity, or other events.
  • Scams and hacks: Cold wallets offer better security; hot wallets are more user-friendly but riskier. Implement strong security measures and two-factor authentication.

Record-Keeping and Reporting

• Maintaining accurate records is critical:

  • Ownership verification: Wallet IDs, transaction history, holding statements, and trustee declarations confirming the SMSF owns the crypto.
  • Valuation: Market value at 30 June, supported by price sources, receipts, and bank statements.
  • Investment strategy documentation: Clearly state why the SMSF holds crypto, its risk considerations, and how it aligns with member objectives.

• Other compliance points include:

  • Sole purpose test: Crypto investments must aim to grow retirement savings, not personal gain.
  • Separation of assets: Crypto must be held in the SMSF's name, not personal wallets.
  • No asset transfers from members or related parties.
  • No use as collateral.
  • Pensions must be paid in cash, not crypto.

Frequently Asked Questions

• How can cryptocurrency be included in an SMSF investment strategy?

  • Update the investment strategy or record a trustee resolution to document the rationale, risk considerations, and alignment with member objectives.

• What ATO guidelines apply?

  • Trust deed must allow the investment.
  • Investment must comply with superannuation rules.
  • Must align with the SMSF's investment strategy and objectives.

• How does crypto align with the sole purpose test?

  • Crypto can diversify the SMSF portfolio. However, investing a high proportion in crypto near retirement may not satisfy the prudence expected under the sole purpose test. Trustees must avoid personal financial gain from SMSF assets.

• How to integrate crypto into an SMSF portfolio?

  • Ensure clear SMSF ownership.
  • Purchase crypto directly from the SMSF bank account.
  • Maintain thorough documentation of the purchase and ongoing management.

Conclusion

• Investing in cryptocurrency via an SMSF can offer diversification and potential growth, but it requires careful planning, robust record-keeping, and strict compliance with superannuation regulations.
• As auditors, we help ensure your SMSF's crypto investments meet all legal and compliance requirements.