SMSF’s investing in cryptocurrency
Table of Contents
- What are cryptocurrencies?
- How can my SMSF buy and sell cryptocurrencies?
- What are the tax implications of SMSF cryptocurrency investments?
- What are the potential risks of SMSF cryptocurrency investments
- How are cryptocurrencies valued?
With around twenty (28%) of the Australian population investing in crypto currency as reported by a recent independent Reserve report. Unsurprisingly, many Australians are venturing into crypto investing via an SMSF due the staggering gains and the benefits of the underlying technology, such as blockchain, smart contracts, NFTs and Defi, to name but a few.
Investing entails risks and responsibilities and an awareness of the super laws and the tax laws, which limit certain types of crypto investing activities, along with over eight thousand ( 8,000) crypto currencies in the market, you are certainly spoiled for choice. These factors only add to making crypto investing in an SMSF, more complicated than investing in crypto personally.
What are cryptocurrencies?
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.
Since 2014, the Australian Taxation Office (ATO) has established a taxation regime for cryptocurrencies which are taxed like CGT assets, like a property or gold investment. SMSFs may invest in cryptocurrencies, provided that:
- They are permitted under the fund’s trust deed
- They comply with the fund’s investment strategy
- They comply with all relevant super legislation, just like any other SMSF investment must do. For example, SMSF cryptocurrency investments must be:
- Held in the fund’s name (not in the names of individual fund members)
- Valued like any Asset to the 30th of June each year
How are cryptocurrencies Valued?
Cryptocurrencies like Bitcoin are valued based
- Scarcity ( only 21 million bitcoins will ever be minted) like gold
- Electricity, as it costs electricity to mine a bitcoin adding a cost of production like mining for gold
- Supply and Demand, which is like the share market and shares
- Many people believe Bitcoin is Digital Gold as its scarcer than Gold and therefore sentiment plays a part in its fluctuations of value
At the time of writing this article, one bitcoin is valued at $60,312 AUD, but in January 2017 it was worth around $1400 per coin and in December of the same year it was worth $23,000 a coin.
The price volatility of Bitcoin and other cryptocurrencies, highlights the inherent high risk nature of cryptocurrencies as a suitable investment for SMSF investors. It is critical that cryptocurrencies are appropriate for all members of an SMSF, giving thought to the age of members, income and timeline to retirement.
Typically, cryptocurrencies play a role as an alternate asset to mitigate against market corrections and to add diversity to an SMSF investment portfolio. These assets are not suited to everyone and again as stated before, are highly volatile and risky.
How can my SMSF buy and sell cryptocurrencies?
To invest in cryptocurrencies your SMSF must setup a SMSF Crypto exchange account in order to buy and sell and use an exchange wallet or a cold wallet to store your crypto assets, ensuring these assets are kept separate to personally held crypto assets on a wallet which is purchased by the SMSF. A crypto wallet is the equivalent of a bank account in the crypto world.
Best practice with SMSF crypto investing is to do the following.
- Use an Australian crypto exchange
- Use a Cold wallet where you control the ‘private keys – seed phrases’
Fees for crypto trades tend to be around the 0.40% – 1.5% mark, so check your providers fees and services before you engage them.
My SMSF Crypto Clients have access to our ‘Crypto Portfolio Tracker’ and crypto asset valuation report to make crypto investing easier along with datafeeds for Coinspot and Swftx crypto exchanges.
Some of the compelling reasons for investing in cryptocurrency via an SMSF are the following.
- Access retirement capital to invest and grow your super
- No capital gains tax in pension phase for crypto assets
- Pay less tax when selling crypto assets
Selling crypto assets that have made any gains, will trigger capital gains tax (C.G.T) which is taxed on 2/3 of the gain at the 15% super fund tax rate. Which is much less than personal tax rates for crypto assets.
What are the tax implications of SMSF cryptocurrency investments?
Cryptocurrencies are regarded a CGT asset or collectables, like gold or a commodity asset. Bitcoin like gold is therefore is taxed as a capital gains tax (CGT) asset. If your fund makes a capital gain when selling a cryptocurrency, you may have a CGT obligation. The CGT rate for SMSF assets that have been held for longer than 12 months is effectively 10%. This is a one-third discount on the full CGT rate of 15% for assets your fund has owned for less than 12 months.
All crypto used to form a SMSF pension, if sold in pension phase with taxable CGT gains, is not taxable up to the superannuation cap of $1.7 million per person. Any income paying crypto, would further not be taxable on this basis in a pension account up the threshold.
The potential risks of SMSF cryptocurrency investments
Cryptocurrencies are not defined in the tax act as ‘money’ but only as a barter instrument or CGT Asset for tax purposes. Therefore, they do not have the backing of any bank or the Australian Government, unlike the Australian dollar, which is backed by the Reserve Bank and the Australian Government. So investors will not receive any government support if a cryptocurrency they hold ceases to exist or is hacked or lost due to user error, for any reason.
Remember the golden rule in crypto. ‘not your keys, not your coins’ so always ensure you hold your crypto on a cold wallet and safeguard your private keys or seed phrases carefully.
Cryptocurrencies are gaining in popularity in SMSF albeit slowly, with only 3600 SMSFs investing in cryptocurrency according to the march 2022 ATO data, which attests to the cautious and responsible manner in which Australians are approaching this asset class. Cryptocurrencies are highly volatile, risky and unsuitable for many Australians approaching retirement. However, taking a long term approach with a longer retirement horizon for younger members who can afford to hodl through the market volatility may prove beneficial for those willing to take on the risk to gain good returns for their retirement nest egg. Always, seek specialist crypto advice, tax and legal advice before embarking on any crypto investing.