SMSFs and cryptocurrency investments

For example, a single Bitcoin was worth $458 in September 2014. Three years later the price hit a peak of $25,506, before dropping back to earth. In October 2020, bitcoin was trading around $15,000.  

Source: Yahoo Finance

As the price history of Bitcoin attests, cryptocurrencies should be viewed as high-risk investments. If you (or members of your SMSF) are risk-averse, cryptocurrency investments are unlikely to be a suitable investment for your fund.

That is not to say that cryptocurrencies do not have a place in a well-diversified SMSF investment portfolio. They are best thought of as an alternative asset class with little or no correlation to traditional asset classes such as shares, property and bonds. But diversification and knowledge are key to reduce potential risks.

How can my SMSF buy and sell cryptocurrencies?

To invest in cryptocurrencies for your SMSF you will need a secure digital wallet – like a bank account in the crypto world. You will also need an account with a crypto exchange, the crypto equivalent of an online broking account.

Robert Joseph, director of SMSF administrator and cryptocurrency specialist MySMSF, says there are dozens of digital wallet providers, but only a handful are suitable for SMSF investors. He says so-called cold wallets such as Ledger and Trezor are most compliant with super regulations. They are also more secure because they allow you to store cryptocurrency offline with a private key.

While some crypto exchanges offer a default wallet, Joseph says these are less secure than cold wallets.

Like all SMSF investments, your SMSF cryptocurrency must be kept separate from your personal cryptocurrency assets.

Joseph says SMSFs must choose an Australian-based crypto exchange that accepts and recognises SMSF investments. He says there are around six exchanges that accept and recognise SMSFs, with ZebPay and EasyCrypto among the cheapest and easiest to use. Brisbane-based Ainslie Wealth has a store front for those who are more comfortable transacting in person. Expect to pay trading fees ranging from 0.4–1% of each transaction, as well as account fees.

Ideally, you should set up a single digital wallet for all your fund’s cryptocurrency transactions to make record-keeping as simple and transparent as possible.

You can use the Australian dollars in your SMSF’s bank account to buy cryptocurrencies. When you’re selling, cryptocurrencies can easily be converted to Australian dollars. It’s important to remember though that the proceeds of SMSF cryptocurrency investments are just like any other superannuation investment. They can’t be accessed until fund members reach their preservation age. A member’s preservation age is between the ages of 55 and 60, depending on their date of birth.

The proceeds received from cryptocurrency sales should be transferred to your fund’s bank account so you can declare any profit or loss you’ve made on any cryptocurrency transactions as part of your fund’s annual reporting obligations to the ATO.

What are the tax implications of SMSF cryptocurrency investments?

It’s a legal requirement for SMSFs to value their assets according to ATO guidelines as part of their annual reporting, and cryptocurrencies are no different. They must be valued at their current market rate as at close of trade on June 30 at the end of each financial year.

Cryptocurrencies are also regarded as an asset for capital gains tax (CGT) purposes. 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.

However, if cryptocurrency assets are being used to fund the pensions of members in your SMSF, any capital gain on their sale is not subject to CGT.

The potential risks of SMSF cryptocurrency investments

Cryptocurrencies are not legal tender, even though they can be used to pay for goods and services if a seller is prepared to accept them. This means that cryptocurrencies 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 are unlikely to receive government support if a cryptocurrency they hold ceases to exist for any reason.

Cryptocurrencies can also potentially be stolen from your fund’s digital wallet by online hackers, though you can (and should) arrange for insurance against this happening. Choosing a cold wallet with a private key, rather than a default wallet offered by crypto exchanges, will provide additional security.

The bottom line

Cryptocurrencies are an investment option available for SMSFs. However, they are generally regarded as a high-risk investment category and require a high level of technical knowledge. For these reasons, it’s worth seeking independent financial advice with expertise in both SMSFs and cryptocurrencies before investing in them.

The information contained in this article is general in nature.