Can Your SMSF Invest In Crypto + What Are The Rules?
Written by: Brittany Bell | Accounting Team
Accountants’ fun fact:
Cryptocurrency is a CGT asset in Autralia for tax purposes, it is not considered money!
…we know from previous articles that my definition of ‘fun’ needs work. It is me after all, your neighbourhood SMSF Specialist Accountant. Helping SMSF Trustees with their compliance needs by day and by night, keeping our dog from making ill-considered choices when it comes to our cats.
Speaking of ill-considered, crypto assets (which includes cryptocurrency) are a high-risk investment and can be complex. Throw your regular SMSF compliance obligations into crypto space and suddenly that complexity is compounded. Like any other investment options, SMSF or otherwise, proper consideration must be given prior to making any investment.
So, where do we begin?
If you are unfamiliar with SMSF investment rules, check out this previous blog we put together: Investing With Your SMSF: What Are The Rules?
Can Your SMSF Invest In Cryptocurrency?
The Law For Crypto + Your SMSF
Welcome back!
Let’s keep it simple, no mining coins and tokens, no blockchain ledger or FOMO of the newest NFT here. I will get straight to it; the superannuation laws do not prevent an SMSF from investing directly in crypto. Exposure to crypto assets can occur through Exchange Traded Funds (ETFs) listed on the ASX or through direct investment of crypto assets.
All Self-Managed Super Fund investments must comply with the same regulatory requirements, and the law requires superannuation Trustees to act in the best interest of their members, with investment decisions made in accordance with the Sole Purpose Test. In other words, does an investment in crypto assets make sense for the goals and objectives of the SMSF’s provision of retirement or death benefits?
Importantly, Trustees and members must not personally gain direct or indirect benefits from the crypto investment – this would breach the Sole Purpose Test.
Does this mean your SMSF can invest in crypto? As with many SMSF questions, the quick answer is that it depends.
Considerations For Your Self-Managed Super Fund
As a Trustee, there are two checks required before investing in crypto assets:
- Does the SMSF Trust Deed allow it?
- Is it consistent with the SMSF Investment Strategy?
We all start somewhere, but it can be difficult to know when to start, especially when it comes to starting your Self-Managed Super Fund! Don’t worry, we’ll break it down for you. How Much Money Do I Really Need For A Self-Managed Super Fund?
The Rules + Compliance For Your SMSF
Those regular SMSF compliance obligations – now added with Crypto!
- Crypto assets cannot be acquired from a related party (not actually, that complex)
There are no related party exceptions that apply to Crypto assets; therefore, Trustees, members and their related parties cannot sell or contribute crypto to the SMSF. No ifs, buts or maybes.
- SMSF Crypto investments must be separate from personal assets of trustees and members (a little complex generally, but no more than any other SMSF investment)
Whatever crypto platform, account or storage method is used, it should be separately identifiable and recorded in the full legal name of the SMSF. Anything less and you are running the risk of a breach being reported to the Australian Tax Office (ATO) come audit time.
Check with your accountant or auditor, however, the full legal name of your SMSF would generally look like:
John Smith and Jane Smith ATF The Smith Family Superannuation Fund
or
Smithy Pty Ltd ATF The Smith Family Superannuation Fund
As Trustees, you must maintain and provide annual evidence of the SMSF’s separate crypto wallet – this also applies to any cold wallet storage.
- Crypto must be valued in Australian dollars, at fair market value, obtainable from a reputable digital currency exchange/website which publishes its rates publicly (more complex)
Crypto value can change constantly, and wildly in some cases (I’m looking at you, Bitcoin). For some SMSF’s, there will be occasions where notable events will require an accurate calculation of member balances at a point in time, for example, starting a pension or making a withdrawal from accumulation.
Regardless of any events during the year, all SMSFs with Crypto assets are required to calculate member balances on 30 June each year. In this instance, the ATO states:
‘The ATO will accept the 30 June closing value published on the website of a crypto exchange that reports on historical crypto values’
To learn more, click here.
Risks Associated With Cryptocurrency + Your SMSF
The digital age brings increased risks to investing, from changes in technology and security to sophisticated scams and fraud.
While these risks are shared across many investment types, there are also heightened and unique risks with crypto assets due to their technical complexity and their decentralised nature.
Crypto is the Wild West of digital assets. The decentralisation (one of the potential attractors of the market) means there is no central oversight or regulation in place by any central bank, authority or government, and this decentralisation (for good or bad) leads to:
- Increased vulnerability and targeting by scams and fraud;
- High security risk of trading platforms being targets of hacking;
- Limited legal protections for investors, as most crypto assets are not covered by financial regulations and protections;
- Challenges with access and recovery due to a lost password or private key; and
- Loss of the physical cold wallet, stored on a laptop or USB and put in a ‘safe space’ but then forgotten.
Can Your Self-Managed Superannuation Fund Invest in Crypto?
It depends.
The rules say yes, but check the SMSF deed and investment strategy.
Here are a handful of considerations or questions before thinking about investing in Cryptocurrency with your SMSF:
- Are you acting in the best interest of the SMSF members?
- As trustees, your investment decisions ned to meet the Sole Purpose Test.
- Should your SMSF obtain crypto assets from a related party?
- That’s a hard no.
- How important is the account name or holder?
- Very, you run the risk of a reportable breach to the ATO if ownership is not clear.
- What are the market valuation rules?
- Every SMSF needs to recognise crypto asset values using publicly available rates from reputable exchanges or websites.
- Where is the biggest risk in crypto assets?
- Decentralisation is linked to increased fraud, security and scam risk.
Canny Advisory + Self-Managed Super Fund Advice
Ultimately, an SMSF can invest in crypto, but in doing so, there is a large amount of compliance to be met.
If you need assistance with your SMSF compliance and accounting needs, get in touch with our specialised SMSF accountants for more information.
