Digital assets that are used as a medium of exchange and a store of value, are referred to as Crypto currency or Digital currency. Essentially, they use various blockchain technologies in electronic ledgers where cryptographic encryption is used to secure both transaction records and ownership of SMSF CRYPTO ADMINISTRATION and transfers of coins.
At the heart of cryptocurrency, is a blockchain, which is just an electronic ledger, which is just like a google sheet, but it is always online and there are many distributed copies, making it hard to hack or shut a blockchain down.
All transactions such as buying or selling of a bitcoin or using a crypto coin to pay for a coffee or a meal or service, are recorded by groups of anonymous computers that are paid a fee to record transactions.
All the information is unalterable due to cryptographic encryption, which only a quantum computer can decrypt, making crypto coins and bitcoin, highly secure, private, without gatekeeper fees and controls, allowing its holders to own and control it.
Due to cryptography privacy benefits, individuals can only be recognised by someone knowing their wallets public address belongs to that individual. This makes blockchains transparent, safe, private and importantly, they are not owned or controlled by any one large organisation like a bank or government.
These are the key reasons for the growth and adoption of bitcoin and crypto currencies.
Crypto currency gains are derived from capital growth on the selling of the currency and there is generally no income tax to pay. Demand and a fixed supply; such as 21 million coins for bitcoin; which is mostly based on investor perceptions and the underlying technologies use cases, determines the currency’s value.
Bitcoin and other crypto coins are very volatile and have small market capitalisations, compared to conventional assets; property and shares; and considered high-risk investments, for these reasons. Valuations can fluctuate based on news, both positive and negative and the activities of traders and large coin holders who’s buying and selling can influence price fluctuations.
More recently, institutional buyers are bringing more stability to crypto markets as adoption of blockchain, Defi, NFT’s and crypto coins in the real world grows and people begin to see how cryptocurrency, blockchains, Defi and NFT’s solve existing problems in our current financial world.
Practical Implications of SMSF CRYPTO ADMINISTRATION:
Because crypto-assets are so new, accounting and administration requires knowledge and experience to perform the tax and audit work for SMSF s holding bitcoin and crypto currencies in general.
The tax treatment of bitcoin and crypto currencies, according to the ATO, is as a CGT Asset like a house or a collectible like paintings. There is generally no income tax to account for, although forks, chain splits, staking and gas earning crypto create a level of complexity for accountants and auditors who are unfamiliar with crypto terms and activities and the tax treatment for these activities.
An experienced and knowledgeable SMSF CRYPTO ADMINISTRATION or accountant is critically important for SMSF fund members, trustees to ensure accuracy,compliance and efficiency in completing annual audits and tax work for SMSF funds holding cryptocurrency and bitcoin.
Investing in Bitcoin and other cryptocurrencies will almost certainly increase the SMSF’s administration, tax and audit costs. This is due to perceived and real complexities in completing the work, such as sourcing transaction data, values and checking the block transactions for changes.
So, the cost an SMSF fund member or trustee will pay for this service can increase based on the type of activities; hodling, trading, staking, mining and hybrid activities and the number of transactions or the time taken to complete the tax and audit work.
Before investing in Bitcoin or other crypto-assets, members and trustees of SMSFs should consider the following:
- Keep your trust deed and investment strategy up to date.
- Ensure your SMSF crypto exchange account is in the name of the fund and not in a personal name, and make sure all transactions are made through that account that relates to SMSF monies.
- Before you start crypto investing or trading, speak with the fund’s administrator or accountant, so you understand what information and documents will be required to account for the SMSFs crypto activities accurately, so the funds auditor and tax agent is satisfied.
- Create an auto-forwarding rule for any coin exchange email transaction confirmations so that your SMSF administrator receives a copy of the invoice/trade confirmation as it occurs.
Setting of an SMSF CRYPTO ADMINISTRATION:
You will need to complete some prerequisite reading and learning around your responsibilities and risks for operating an SMSF as a starting point. Check your fund balances are $100,000 individually or combined
Check fees to operate your SMSF including:
- Administrator fees and if they included Tax and Audit work
- Asic Annual Fee for company trustee entity
- ATO levy – which is included in your annual tax bill and deductible
- Identify your SMSF Crypto Administration or Accountant
- Check that they have at least 3 years experience in this specialist field
Example: My SMSF has five ( 5) years experience working with crypto SMSFs
SMSF Setup Steps:
You will the following information and details provided to your SMSF Administrator or Accountant:
The name of the SMSF:
Most funds use their members surname and first name initials to name their SMSF.
Eg: T & J Jones Super Fund
Usually most SMSF members use the same name as the SMSF name.
Eg: T & J Jones Super Fund Pty Ltd.
A signed copy of the SMSF trust deed is required and your SMSF administrator normally includes this cost with the setup fee.
Eg: My SMSF charges $880 for an SMSF Setup which includes
- Corporate ( company) Trustee
- SMSF Deed – with crypto investing allowed
- Apply for the funds ABN / TFN numbers
- Do Apply for a FREE fund bank account with Macquarie Bank of Australia
- Apply for the funds Electronic Service Address – SMSF Mailbox
- prepare the super rollover forms. client posts the forms to current provider
- assist with super choice forms to allow super contributions by an employer
- Provide a Investment Strategy, Binding Nominations forms, PDS
- All required forms to setup a compliant SMSF
It is important you check what is included in your SMSF setup fee, as some providers only provide a company incorporation, deed, minutes and ATO declaration for members. They often provide an information sheet to address the other requirements listed above.
SMSFs funds investing in SMSF Crypto investments:
It will benefit from the reporting provided by My SMSF / My SMSF Property given their experience and knowledge and data feeds and Crypto reporting resources for members,as well as mobile friendly app to access all features.
Administration of SMSFs:
To maintain their fund’s compliance with superannuation legislation, SMSF trustees have a number of administrative responsibilities, including:
- hiring an independent auditor who is licensed by the Australian Securities and Investments Commission (ASIC); as per section 109 SIS Act
- making investment decisions for all members that are consistent with the ‘Sole Purpose’ Test
- notifying the ATO ( the SMSF Regulator) of any changes in members or trustees, and
- keeping track of all general and financial fund records.
Remember, most administration providers Like My SMSF CRYPTO ADMINISTRATION provide the fund members with a fund audit; completed by an independent auditor; a tax return and financials completed by a tax agent. Some accounting providers need to demonstrate their independence from the auditor to ensure the fund is managed compliantly.
The Dangers of cryptocurrency investments in SMSFs:
Although cryptocurrencies are gaining more acceptance and adoption, they are not legal tender or currency, but CGT assets as per the ATO’s tax determination in 2014. This means that, unlike the Australian dollar, which is backed by the Reserve Bank and the Australian government, cryptocurrencies have no bank or government backing. As a result, if a crypto currency that an SMSF investor owns ceases to exist for any reason, they are unlikely to receive government assistance, unlike the with retail super funds and government backed currency.
Online hackers may be able to steal cryptocurrency from your fund’s Exchange wallet or from a cold wallet.However,exchanges now hold insurance for crypto assets. The best way ; this is what My SMSF Advocates;is to protect your crypto assets by using a cold wallet with a private key controlled by the SMSF members, instead of a default wallet provided by an SMSF crypto exchange. These measures will increase security and mitigate some risks.
Can an SMSF invest in Cryptocurrency and Bitcoin, is it legal?
The super laws ( SIS Act 93 -98) does not specifically restrict or recognise bitcoin and crypto assets. The sole purpose test requires members of SMSFs to invest in suitable assets that can provide a future retirement income. Bitcoin and crypto currencies are gaining worldwide adoption due to many benefits and from an investment point of view, it is the most successful asset over the last 10 years.
As long as the fund deed allows crypto and bitcoin and the funds investment strategy is updated to reflect crypto currency and the fund reports all assets transactions in its financials and tax reporting. Bitcoin and crypto currency is permissible for Australian SMSFs to invest in.
What if I lose My Crypto Currency or Bitcoin?
This may happen and sadly due to lost private keys, exchange hacks or a security breach, you could possibly lose your crypto assets. Over the last five years of SMSF cryptocurrency and Bitcoin Administration and Accounting work we have seen two clients lose all of their crypto which represents less than 1% of our SMSF Crypto clients.
Most SMSF Crypto Investors take very good precautions, such as always holding crypto in a cold storage wallet, splitting seed phrases or using multisign cryptographic signature wallets to mitigate these risks. There are greater risks that paper money printing is devaluing currencies worldwide and risks of third parties controlling your valuable savings as we saw in the GFC in 2008.
What are some of the drawbacks of cryptocurrency?
- It has many technical concepts, such as wallets, private keys and blockchains, which are unfamiliar to understand and time consuming to learn
- Price volatility given the newness of the sector, speculation and manipulation by some market users makes crypto unattractive to some
- It is not tangible and not held by a reputable financial institutions, which is a concern for a lot of older Australians
- There is the potential for tax and regulatory changes in the future
Cryptocurrencies are an investment opportunity for SMSFs, given historical high gains. They are, however, widely recognized as a high-risk investment category that necessitates a high level of technical expertise, learning and patience. For these reasons, before investing in Cryptocurrency in an SMSF, it’s a good idea to identify SMSF administration and accounting providers with experience and knowledge of SMSF Crypto and Bitcoin compliance requirements.
SMSFs and their members and trustees, investing in crypto need to ensure they are utilizing best practices in exchange, wallet and security management facets of the crypto SMSF investing and SMSF crypto administration and accounting process.