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Self managed super funds (SMSF) aren't for everyone, but they can be a helpful way of diversifying a retirement portfolio in ways you can't with industry or retail superannuation funds.
As such, it's possible to buy digital assets, including Bitcoin and other cryptocurrencies, to hold in a SMSF.
This guide provides a step by step walkthrough of how to add Bitcoin and other cryptocurrencies to your self-managed super fund, and some things to know when you do. It assumes that you already have a SMSF, and that you've done your homework, consulted appropriate professionals and after careful consideration, made the informed decision that cryptocurrency is a suitable investment for your SMSF.
Compare providers that offer crypto SMSF accounts
What's in this guide?
- Compare providers that offer crypto SMSF accounts
- Prepare your SMSF for cryptocurrency
- Understanding cryptocurrency taxation
- How to separate SMSF cryptocurrency from personal assets
- How to valuate cryptocurrency
- Avoiding related-party transactions
- Passing the sole-purpose test
- Releasing cryptocurrency payments
- Things to consider when adding cryptocurrency to a SMSF
Prepare your SMSF for cryptocurrency
Your cryptocurrency SMSF holdings will meet all the same obligations as "normal" SMSF investments. But as purely digital assets, cryptocurrencies have to meet these obligations in slightly different ways.
Firstly, as you know, cryptocurrencies are volatile, risky, complex and susceptible to risks that other asset types aren't.
As such, the first step is making sure your fund's trust deed and written investment strategy can accommodate these risks. You should also confirm that any cryptocurrency holdings in your SMSF will be compliant with SISA and SISR regulatory requirements concerning investment restrictions.
Understanding cryptocurrency taxation
Cryptocurrency gains or losses are typically taxed as capital gains or losses. When you sell cryptocurrency, including trading one cryptocurrency for another, you trigger a capital gains event, and will have to pay capital gains tax (CGT) on the difference between the price you acquired the cryptocurrency at and the price you sold or traded it at.
This is where the tax benefits of a SMSF come in.
As SMSF holdings, those cryptocurrency profits will typically be taxable at the concessional 15% SMSF rate, rather than the full amount.
How to separate SMSF cryptocurrency from personal assets
To be in custody of cryptocurrency is to essentially be the keeper of a long and complex password known as a private key, which is used to unlock a cryptocurrency wallet.
The wallet itself is identified by a separate code, which is known as the public key or wallet address.
Because SMSF holdings must be kept distinctly separate from personal assets, you will need to have keys and wallets specifically for your SMSF cryptocurrency. The SMSF fund itself must have clear ownership of the relevant keys, and must be able to provide evidence of a wallet that is separate from any cryptocurrency wallets used by trustees and members personally.
There are two ways of doing this. Which way to choose depends primarily on whether you want the trustee to personally take custody of the private keys, or whether you'd prefer for a third party service to hold them.
If the trustee is taking personal custody of the private keys
The buying or selling of cryptocurrency assets should be recorded in a way that identifies the trustee – in their capacity as a trustee for the SMSF rather than as an individual – as the owner of the relevant cryptocurrency.
Here the trustee will need to have a cryptocurrency wallet for the management of the keys.
The cryptocurrency itself can be identified by the public key or wallet address. The trustee should not disclose the private key to anyone.
If using a third party
Essentially, by providing details such as the registered trust name and address, the trust ABN, a copy of the trust deed and trust beneficiary details, the cryptocurrency exchange opens an SMSF account in the name of the trustee.
Through this, the trustee can access their cryptocurrency holdings in a more conventional way (such as with email and password).
The advantage of this, relative to the trustee taking personal custody of the private keys, is that it makes buying, selling and record-keeping quicker and easier, and it means the trustee doesn't have to worry about private key management.
The downside is that the private keys are in the possession of the cryptocurrency exchange or other third party, which opens up some risks. For example, in the event that the exchange gets hacked, your SMSF funds may be stolen and unrecoverable.
- Decide who should have custody of the private keys.
How to valuate cryptocurrency
As with any other asset, you will have to valuate SMSF cryptocurrency holdings for tax and other purposes.
The challenge is that cryptocurrency is very volatile and prone to price differences on different exchanges.
When valuing cryptocurrency, you'll want to take their obtainable market value, measured in Australian dollars, according to a "reputable" cryptocurrency exchange, the ATO says.
To retroactively valuate cryptocurrency on 30 June, the day the ATO accepts is the 30 June closing value published on the website of a cryptocurrency that reports historical values.
- Familiarise yourself with cryptocurrency valuations.
Avoiding related-party transactions
SMSFs are generally prohibited from acquiring assets from related parties, such as members or trustees, with a few exceptions.
However, none of those exceptions apply to cryptocurrency. There are no situations where a SMSF can acquire assets from related parties and it should be avoided.
Passing the sole-purpose test
A SMSF must be solely for the purpose of saving for retirement.
The ATO advises that it's unlikely a SMSF will meet the sole-purpose test of trustees or members, directly or indirectly, obtaining a financial benefit from the fund's cryptocurrency. For example, if cryptocurrency purchase commissions are paid to a trustee or member personally.
- Ensure your planned cryptocurrency holdings pass the sole purpose test.
Releasing cryptocurrency payments
Depending on the situation, cryptocurrency in a SMSF can be directly sent to a beneficiary or converted to cash.
If a condition of release is met, cryptocurrency can be transferred to the beneficiary as a lump sum.
However, pension payments must be paid as cash.
Things to consider when adding cryptocurrency to a SMSF
- There are tax advantages to holding cryptocurrency in a SMSF but there are also downsides. Depending on your situation, the downsides may outweigh the benefits.
- Cryptocurrency is unpredictable and volatile. As such, it may be better suited to younger people with a higher tolerance for financial risk than people closer to retirement.
- Different forms of cryptocurrency custody carry different risks. The trustee needs to be well prepared if they'll be handling private keys, but holding funds on exchanges is widely regarded as being less safe than taking personal custody.
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