SMSFs and cryptocurrency: A guide
There are rules to be aware of before diving into the sector.
Cryptocurrency is a trillion-dollar asset class and self-managed super fund (SMSF) are taking notice. Trustees have been pouring hundreds of millions into digital assets, but is it a legitimate investment choice and what are the rules for SMSFs?
The latest Australian Taxation Office (ATO) data shows a steady increase in cryptocurrency assets held by SMSFs. As of the September quarter 2021, some $228 million was invested in the asset class, up from $212 million in the June quarter.
While still representing a tiny portion of all SMSFs assets invested, crypto’s rise in portfolios highlights growing interest.
“It’s what the internet was back in the 90s. Now look what it’s done,” said an SMSF investor who reportedly invested half his SMSF in cryptocurrencies. “If I’m buying and holding for the long term, why wouldn’t I use my super funds as well?”
The past year has been described as a “banner year” for cryptocurrency, with digital tokens such as bitcoin and dogecoin hitting all-time highs. The overall market topped US$3 trillion in value, helped by the growing popularity of digital assets such as non-fungible tokens (NFTs).
Currently, SMSFs retirement accounts can include cryptocurrency. However, there are rules to be aware of before diving into the sector.
ATO regulations
Under ATO rules, bitcoin and other cryptocurrencies are not treated as cash but as assets liable for capital gains tax (CGT).
The tax consequences vary depending on each fund’s circumstances and the ATO requires trustees to keep records of all cryptocurrency transactions, whether buying or selling.
SMSFs must also ensure that cryptocurrency investments:
- are permitted under the fund’s trust deed;
- are in accordance with the fund’s investment strategy;
- comply with SISA and SISR regulatory requirements concerning investment restrictions.
SMSFs are “strongly encouraged” by the ATO to seek independent advice before undertaking any investment in cryptocurrencies given the risks involved. ASIC warns that the sector is largely unregulated, technically complex and prone to hackers and scammers, with market values fluctuating in line with media hype and investor opinion.
Cryptocurrency investments must be held and managed separately to trustees’ personal or business assets. Trustees must have evidence of a separate cryptocurrency wallet for the SMSF.
3 rules for buying and selling
Unlike listed securities and business property, cryptocurrencies cannot be acquired from fund members, their associates or employer sponsors, collectively known as ‘related parties’. SMSF trustees and members therefore cannot make in specie contributions or other transfers of cryptocurrencies to their funds.
SMSFs can acquire cryptocurrency from unrelated third parties such as an individual or broker, provided the transaction is conducted on an arm’s length basis at commercial market rates. No ‘mates rates’ allowed.
ATO valuation guidelines require fair market value for cryptocurrencies be obtained from a “reputable digital currency exchange or website that publishes its rates publicly.”
Similar to other SMSF investments, a sole purpose test also applies, with the SMSF required to meet the sole purpose of providing retirement benefits to be eligible for tax concessions.
“It is unlikely that an SMSF will meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements,” the ATO says.
“For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally.”
There are also rules regarding pension and benefit payments. While in specie lump sum payments can be made via transfer of cryptocurrency, pension payments must be made in cash.
Investment pros and cons
Given the rules regarding cryptocurrencies, are they a worthwhile asset class for SMSFs?
Super specialist Darren Kingdon suggests they can “add diversity to a portfolio since they behave differently to traditional investments like shares and property.”
However, given the asset class’s volatility, Kingdon suggests limiting allocations to “a small percentage” of the fund’s overall assets.
Even tiny quantities of cryptocurrency increase the volatility of a portfolio significantly. Morningstar’s Amy Arnott and John Rekenthaler argue stakes 2% or less are sufficient for those looking for diversification.
SMSF trustees should also remember common cryptocurrencies such as Ethereum or Bitcoin do not generate income by themselves.
SMSF specialist adviser Liam Shorte notes that “thankfully not too many [millennial investors] are jumping into crypto via their SMSFs yet, which shows they are assessing the risk.”
For SMSF investors considering the sector, an exchange-traded fund with broad exposure to the cryptocurrency ecosystem is an alternate route.
In November 2021, BetaShares launched the BetaShares Crypto Innovators ETF (ASX: CRYP), providing exposure to “global companies at the forefront of the dynamic crypto economy.”
Amid strong demand from retail investors, the fund manager is also planning more cryptocurrency funds, including the upcoming BetaShares Bitcoin ETF (ASX: 1BTC) and the BetaShares Ethereum ETF (ASX: 1ETH). The ETF provider has yet to announce launch dates for the new funds.
The sector remains full of risks. A scam coin claiming affiliation with the popular Netflix series “Squid Game” defrauded investors out of millions last November.
Still, with cryptocurrency assets continuing to swell in size and collect institutional backers, the new kid on the block looks here to stay.
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