Whether you’re watching it on the news, talking about it with a co-worker, or it’s listed as an option for payment at a local vendor, the topic of cryptocurrency is a hard one to avoid.
With Bitcoin benefiting from price surges, and with all the buzz about what it all means, SMSF (self-managed super fund) investors in Australia are taking cryptocurrency more seriously than ever before. Many people are wondering how something like SMSF — which is heavily regulated — could make an investment in a decentralised currency such as Bitcoin.
Bitcoin’s lucrative nature has seen a fairly substantial increase in SMSF investment. However, this has also attracted a lot of attention from the ATO, which crack down heavily on tax obligations as well as regulations.
To help alleviate your questions and concerns, we’ve made some key points for you to take home about what SMSF trustees should consider if they are looking at their portfolios and are considering adding Bitcoin.
Remember, Crypto Isn’t the Same as a Cash Investment
First, let’s not get too far ahead of ourselves with the ins and outs of cryptocurrency. One thing you need to remember is while crypto might share a lot of the same characteristics as cash money, they don’t share the same existence in a physical sense. But just like plain old money, Bitcoin and other cryptocurrencies can be used to buy a wide variety of services and goods.
The main distinction between the two is that crypto by its very nature is a form of decentralised currency. This means there are no borders between countries. Since there is no central bank or an administrator of any kind, cryptocurrency can have transactions directly between users, without any sort of need for a third party, such as a bank.
SMSF investors in Australia are adding Bitcoin and other cryptos to all of their portfolios as more of an investment rather than a type of cash. Since they are decentralised by their fundamental nature, you need to be aware of the regulations of putting your Bitcoin into an SMSF.
Confirmation of Crypto Ownership
If you want to trade in Bitcoin or other cryptos, you’re going to need an encrypted, unique code that’s known as a wallet. Its purpose is to essentially function as an address that transactions are sent to and from.
SMSFs, for example, need their very own wallet that is fully separate from any other wallets you may have for personal crypto investing. That means that any investments you make into cryptocurrency need to belong to your SMSF, and the SMSF only.
The only way of identifying these wallets is by their corresponding IP address, so it can be somewhat tricky for the Bitcoin funds to have the asset registered to a name. If you’re a trustee and you want to invest in Bitcoin in Australia, you need to make sure an SMSF auditor can spot the following:
- The wallet’s trading history at the established IP address. That means it needs to match the bank account that goes to the fund exactly. So, you don’t get yourself into hot water trying to tack everything down, it’s recommended practice when dealing with SMSF to open up a separate bank account that’s explicitly for crypto trading.
- It’s required to have what’s known as a “declaration of trust”, which confirms the fund is the owner of the cryptocurrency. This is because the wallet itself cannot prove the investment is solely held for the SMSF.
The “Sole Purpose” Test
The single (sole) purpose of the SMSF fund is to provide the member’s retirement benefits to their dependent(s) in the event the member passes away before they retire. An SMSF’s trustees — whether they’re currently holding cryptos or considering holding them — need to be absolutely clear that their investment is not to be wrapped in their own personal assets.
In the event that occurs, the sole purpose test would be considered breached.
Valuation All asset values of an SMSF must be adherent to ATO and SISA guidelines. Since Bitcoin and other cryptocurrencies undergo daily value changes, it’s now considered acceptable by the ATO to confirm the 30 June market value from a digital currency exchange that is reputable and publishes historical cryptocurrency values.
Cryptocurrencies such as Bitcoin are viewed as an asset as far as the ATO is concerned. If you sell them at a profit, you’d be looking at a capital gains tax event — in turn, of course, resulting in a capital gains tax. Conversely, if you’re selling your asset at a loss, you’d be triggering a capital loss.
You should also be aware that trading costs involved in cryptos are not able to be claimed as a tax deduction. They instead form as a portion of the cost base of the crypto asset. If you sell your Bitcoin while some members of the SMSF are in a pension phase, that particular gain would be considered exempt from any tax consequences.
Buying From a Related Party in the SIS Act’s Section 66 states that SMSFs are prohibited from gaining assets from a party that happens to be related with very few exceptions, however. In a ruling by the ATO, exemption assets do not include any form of cryptocurrency, which means SMSFs are not about to gain this type of asset from parties that are related.
As you’ve seen with a wide variety of cryptocurrencies to date, Bitcoin can be a viable and even great investment for SMSFs in Australia that are looking to dramatically increase retirement benefits for members. You just want to make sure you pay attention, do your research, and plan appropriately. Otherwise, you could be exposing yourself to substantial losses.