SMSF CRYPTO AND BITCOIN SMSF [Step By Step Guide]

By September 9, 2021 September 15th, 2021 Blogs

Bitcoin and other famous cryptocurrencies have lately evolved into a recognized, emergent asset class, with many investors considering SMSF Crypto and Bitcoin SMSF. Cryptocurrency investing in an SMSF has been a practice since 2014 and Bitcoin SMSF investing has become a more common practice in the last 5 years as an asset that can help diversify a self-managed super fund’s investment portfolio.

So, is it possible for an SMSF to invest in Bitcoin and other cryptocurrencies? And, if this is the case, what should SMSF trustees and anyone who wants to invest their super in Bitcoin be mindful of?

The number of self-managed super funds (SMSFs) and their assets continue to rise according to the ATO. The total assets owned by SMSFs now exceed $750 billion, which are shared by 1,118,650 members.

Remember the days of small Bitcoin groups gathering at the local pubs? Well, those less illustrious days are well behind for this sector with greater media coverage, bringing awareness of high returns and the risks of cryptocurrency investing. It’s fair to say, it’s not for everyone, but a recent finder.com report reveals that 17% of Australians own Bitcoin and other cryptocurrencies, which is 1 /6 Australians.

My SMSF has provided SMSF Bitcoin and Crypto Currency Administration services to SMSF investors since 2016, giving us experience and knowledge on Bitcoin SMSF accounting and auditing practices. It is now fair to say that increasing values of Bitcoin over 12 years with over 100% returns annually has shed a spotlight on this sector that has resulted in great, albeit volatile returns for SMSF Bitcoin holders.

With 31% of Australians expected to own Bitcoin by 2024; according to reports; an SMSF with 0% tax on capital gains or income, in the pension phase, makes SMSF Bitcoin investing an attractive and recognized home for people who understand and appreciate and expect greater value growth in bitcoin and other cryptocurrencies. 

Bitcoin investing in an SMSF is not new, and it is fast becoming a genuine alternative asset class, with performance and growing followers to attest to this.

However, like with any investment, it is critical to understand how cryptocurrencies function, the risks of hacks, loss of seed phrases, and the high volatility, which make it an asset class for some but not suited to many conventionally minded or risk-averse SMSF investors. Always seek advice, both tax and legal, before dipping your toe into the crypto market.

There are hundreds of cryptocurrencies, but the most well-known are Bitcoin, Ripple, and Ethereum.

SMSFs:

An SMSF is a self-managed super fund that gives you more control and choice over how your retirement funds are invested. We take a look at how they work, as well as some of the advantages and disadvantages of going it alone via an SMSF for Bitcoin investing.

SMSF Crypto and Bitcoin SMSF Investing Checklist:

These are some things to check before investing in Bitcoin via an SMSF

  • Does your SMSF Trust deed allow investing in crypto?
  • Update your deed where this is a concern.
  • The fund’s Investment Strategy must be updated to reflect crypto investments and crypto, must be suitable as an investment for all of the SMSF members

Does your accountant understand crypto tax?

This is an important check as most cryptocurrencies are treated as CGT assets for tax purposes and not as legal currencies as the name suggests.
There are different applications of crypto investing, like trading, staking, mining, and other activities that require greater understanding, experience, and knowledge.

SMSF crypto and Bitcoin SMSF investing gives you advantages of SMSFs, investment choice, and full ownership and control, make this investment vehicle a popular way to hold Bitcoin, particularly with great gains such as over 8000% returns over 12 years.

When you have staggering gains and you sell your asset to diversify, it will trigger capital gains tax on the gains. SMSF’s are a great way to hold Bitcoin and mitigate capital gains tax on Bitcoin when selling as there is 0% tax in the pension phase for SMSF pension members.

In an SMSF, Income is taxed at a rate of only 15% under current SMSF regulations, while long-term profits are taxed at an effective rate of 10%. Income earned by assets in a retirement pension SMSF is taxed at 0%.

So, investing in Bitcoin in an SMSF might be a great way to manage Bitcoin and cryptocurrency volatility and lower tax or pay no tax at all in the pension, phase, making an SMSF a potentially attractive option for investing in Bitcoin for retirement purposes for suitable investors.

SMSF Investment Strategy:

  • Understand your legal obligations.
  • Recognize the risks and the return trade-off.
  • Diversify your investment
  • Ascertain that the SMSF has sufficient liquid assets to meet operational costs
  • Hold insurance to manage debts.
  • Keeping the fund compliant is a huge concern for many SMSF trustees. There are a lot of rules and regulations to follow, and the consequences of not following them can range from small fines to significant tax penalties for your SMSF. As the fund’s trustee, you have almost complete control over almost all of the criteria for keeping your SMSF compliant. This includes creating and implementing investment plans, as well as managing payments, contributions and assisting your SMSF Administrator; like MY SMSF; with fund compliance activities.

The Sole Purpose Test:

  • ● The sole purpose test ensures that an SMSF that holds assets like crypto and Bitcoin SMSF is maintained solely for the purpose of paying retirement benefits to members or their dependents in the event that a member dies before retirement. This means the trustee, members must make sure the asset is suitable for all members of the fund and are comfortable with the risks.
  • ● Members and trustees or any related party, cannot directly or indirectly, profit financially from investment decisions and arrangements (other than influencing investment decisions that increase the returns of the fund). The separation of assets under section 4.09a to ensure ownership and control is maintained by the SMSF and no present-day benefit, or mixing of personal assets with SMSF assets is breached. Further, pursuant to section 109 of the SIS Act all dealings are commercial and at arm’s length.
  • ● Given Bitcoin’s high volatility and the fact that it looks (at the moment) to offer only speculative capital growth potential, there is clearly a substantial risk associated with any Bitcoin investment. As a result, a sensible SMSF trustee may determine that Bitcoin or other cryptocurrencies should make up only a modest portion of a fund’s entire investment portfolio. What is prudent in any instance would depend on the fund’s specific conditions, such as how near the members are to retirement and the risk appetite of all members as well as the liquidity requirements of the fund and other factors. Most SMSF managed by My SMSF that hold Bitcoin is managed by younger investors, aged 30 – 45 with prior experience with crypto investing outside of an SMSF. Further, most SMSF members; that My SMSF sees; tend to hold the top three coins in the marketplace, with a view to risk management and lower volatility.

FAQS:

Is SMSF an appropriate option for me?

A self-managed super fund (SMSF) may be a good approach to save for retirement for certain people, who have the time and interest in researching and managing their retirement savings, but it is definitely not for everyone. The responsibilities with investment decisions and administration rest with the SMSF members, trustees at all times, making this type of added responsibility unsuitable to all Australians.

 Is it possible for my SMSF to invest in Bitcoin?

While SMSFs are not barred from investing in cryptocurrencies, the investment must meet the following criteria:

Be permitted under the trust deed of the fund. Be consistent with the investment strategy of the fund and the super laws and all tax laws must be adhered to at all times.

What are my tax and audit responsibilities if I hold Bitcoin in an SMSF?

If your SMSF holds Bitcoin or any other cryptocurrency, it must provide the following proofs to the fund’s auditor and accountant:  Transaction reports on all buys and sells of crypto, a receipt for each buy or sell order and a valuation of the assets held at 30th of June each year.

Conclusion:

  • Investing in Bitcoin or other cryptocurrencies is not expressly prohibited for SMSF trustees or members in Australia. However, as previously said, there are several compliance aspects to consider. Finally, a trustee must behave sensibly and in conformity with the governing regulations, the funds deed, and the investment strategy of the fund.
  • SMSF members and trustees should seek legal and tax advice, before investing in Bitcoin to ensure they are informed on all compliance issues. The rise of cryptocurrencies as a legitimate financial investment has created new challenges for SMSF regulators SMSF Administrators alike, such as My SMSF, who call upon its expertise and experience to compliantly manage all types of Crypto and Bitcoin investing activities within an SMSF.
  • CryptoCurrency is regulated by a licensing regime for exchanges managed by Austrac and by tax laws which came into place in 2014 to treat the taxation of Bitcoin and other cryptocurrencies held in an SMSF or outside.
  • Australians who want to diversify their SMSF by investing in Bitcoin and cryptocurrency can do so, as long as their SMSF deed permits investing, the fund’s investment strategy documents the investment and this document is reviewed annually, and that assets are kept separate from personal assets and stored securely and independently and in the name of the SMSF, where there is no concern around the ownership and control of Bitcoin or crypto holdings by the SMSF, at all times.

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