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Cryptocurrencies are a relatively new form of investment that frequently divide opinion. Hundreds of cryptocurrencies exist, but the most well-known are Bitcoin, Ripple and Ethereum.
In 2014, the Australian Taxation Office (ATO) ruled that cryptocurrencies are a legitimate form of investment for SMSFs, provided that:
- They are allowed for 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), and
- be valued according to ATO guidelines (explained later in this article)
It’s currently estimated that only about 1% of Australian SMSFs (i.e. about 6,000 out of nearly 600,000 funds) currently invest in cryptocurrencies, but that this number is rising.
As with any investment, timing is everything. For example, a single Bitcoin was worth $US20 at the start of 2013. Within 4 years, the value had risen to $US17,500, but it has since fallen to just under $6,000 in May 2019. Cryptocurrencies are generally viewed as high-risk investments accordingly. If you (or members of your SMSF) are risk-averse, cryptocurrency investments are unlikely to be a suitable investment for your fund.
In addition, if your fund members do want to invest in cryptocurrencies, they should form part of a diversified investment portfolio to reduce the potential risk.
What is a cryptocurrency?
Cryptocurrencies are generally purely electronic. They can be used for online peer-to-peer transactions provided that a buyer has a cryptocurrency and a seller is prepared to accept it.
Financial institutions aren’t involved in these transactions. Payment between the buyer and the seller is facilitated via digital wallets (explained later in this article).
Cryptocurrencies use code to:
- ensure online transaction security,
- control the creation of additional units of the currency, and
- verify the transfer of the currency.
How cryptocurrency transactions work
Cryptocurrency transactions are based on blockchain technology. All transactions are registered to online addresses in the blockchain. Each new transaction creates a new block in the chain, which can never be changed or removed. This permanent linear sequence ensures that the currency can’t be spent more than once by the same owner, avoiding the potential for fraud and duplication.
An algorithm creates new units of the currency to keep up with the increased demand as the blockchain network attracts more users.
What is the value of cryptocurrencies?
Like any currency, cryptocurrencies only have value if enough people recognise them as an acceptable form of payment in exchange for goods and services.
And like any currency, the value of cryptocurrencies can rise or fall over time based on the forces of demand and supply.
How can my SMSF buy and sell cryptocurrencies?
You can buy or sell cryptocurrencies via digital wallet services like Xapo and Coinbase. These service providers typically charge fees based on the value of each transaction. 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 SMSFs cryptocurrency investments?
It’s a legal requirement for SMSFs to value their assets according to ATO guidelines as part of their annual reporting. Cryptocurrencies must be valued at their current market rate at the end of each financial year (i.e. 30 June) during this process.
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 is currently 10% for SMSF assets that have been held for longer than 12 months. If you make a capital gain on selling a cryptocurrency that your fund has owned for less than 12 months, the CGT rate is 15%.
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. This means that if a cryptocurrency ceases to exist for any reason, there is unlikely to be any government support for affected investors.
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.
The bottom line
Cryptocurrencies are an investment option available for SMSFs. However, they are generally regarded as a high-risk investment category, so it’s worthwhile to seek independent professional advice before committing any of your funds to them.
The information contained in this article is general in nature.