Self-managed super fund (SMSFs) participants are known to often pick a property or even shares for investment. Cryptocurrency is also gradually joining the list as a popular and reliable form of investment for any SMSF Setup.
The ATO (Australian Tax Office) report for 2020 to 2021 indicates that the total amount invested in cryptocurrency by SMSF investors was $212 million. This was only $190 million when this asset class was listed in June 2019. An increase in investors means that other investors will also start looking forward to expanding their portfolios. This rise is not going to see a decline anytime soon. We have compiled this guide to help you make the best possible choices. Today, we shall look at four things all investors should know about SMSFs and cryptocurrency investments.
Overview: Cryptocurrency and SMSFs
Cryptocurrency has features similar to traditional currency, except that it is purely digital. Another major difference between both cryptocurrency and traditional money is decentralization. This means that cryptocurrency is directly traded between two people without the involvement of a bank or third party. There are no geographical or political restrictions and all cryptocurrency owners get to store their digital money in an online, personal wallet.
Since the ATO now recognizes crypto as an asset for tax requirements, SMSF investors can now invest their retirement money into the crypto market. Self-managed super funds allow any person to have complete control over their retirement savings. It is totally up to them how they invest, what risks they are willing to take, and whether they wish to invest in crypto.
4 Things You Need to Know About SMSFs and Cryptocurrency
Now that you have a general idea of SMSFs and crypto it is time to look at some important things you should know before investing:
Trust Deed and Investment Strategy Must Permit Cryptocurrency Investments
Since crypto is an asset, the trust deed of your funds and the document stating your investment strategy must permit you to invest in digital assets. An SMSF trustee will face no trouble if their documents already have a clause that allows such investments. However, you will have to get the necessary changes to be legally allowed if you do not already have permission. You will be granted permission to invest in crypto users by the SISA (Superannuation Industry Supervision Act) 1993 and SISR (Superannuation Industry Supervision Regulations) 1994. Your investment strategy document should also clearly define liquidity specifics and risks involved due to cryptocurrency investments.
Crypto Is Not Recognized As a Cash Investment By the ATO
The ATO does not consider crypto as a cash investment. Instead, they recognize it as a Capital Gains Tax (CGT) asset. This means you need to consider multiple tax rules to invest:
- Any investment expenses are not considered a tax cut unless an individual is a cryptocurrency trader
- All crypto investments trigger CGT which means you will have to pay 10% to 37% on every successful cryptocurrency sale
It is important to note that tax laws and super laws are only applicable to SMSF members once they get to the pension phase. If an SMSF member sells crypto during the pension stage, they will not have to pay the CGT.
Trading History Should Be Visible to Auditors
All SMSF members or trustees must make sure that they are fully prepared for auditing. This means that auditors should be easily able to view and identify the trading history of a crypto wallet registered under the SMSF holder’s name.
Virtual wallets are unique, but fail to provide details of transactions that relate to an SMSF, so it is a good idea for a trustee to set up a new bank account. This allows auditors to trace and track payments while matching them up easily with the fund’s bank account.
- All SMSF transactions must fulfill the sole purpose test to prove that any profits that are being made are solely for the benefit of an SMSF fund
- Personal assets and mutual assets must be kept separate so that the ATO does not consider transactions a breach of the sole purpose test
- AN SMSF fund must be issued a separate digital wallet that is not mixed up with the members’ personal wallets
Cryptocurrency Must Not Be Obtained From a Third Party and Must Coincide With Yearly Validation Requirements
The SIS Act states that it is illegal to obtain crypto assets from any third party including family, relatives, members, trustees, companies, or trusted units. This makes all transactions simpler.
SMSF members are also not allowed to sell or gift personal crypto assets to an SMSF fund.
Crypto profits must be made through an unknown third party only. All assets need to also be adjusted according to the true or current market values. This is challenging as crypto rapidly changes daily. Due to this, the ATO allows annual or yearly validation of funds. All funds must be valued through a renowned digital currency exchange on the same date each year.
Since cryptocurrency investments have become so popular, the ATO is coming up with new rules, tax obligations, and regulations. You also need to make sure you keep SMSF fund rules in mind. The four things we have listed above are good enough for a start but do not count as the ultimate list. It is a good idea to get in touch with an SMSF accountant so that you can smoothly navigate an SMSF setup and cryptocurrency investments.