Here are some key things you need to know before you decide to invest in crypto within your SMSF.

Crypto is NOT a Cash Investment

In 2014, the ATO released tax determinations (TD 2014/25 and TD 2014/26) which stated the nature of cryptocurrency for tax purposes. Crypto is, in fact, a 'CGT Asset' for subsection 108-5(1) of the Income Tax Assessment Act 1997.

These determinations cleared some confusion for investors, as many assumed the investment was a 'Foreign Currency' and thus attracted different tax treatments.

The effect of this decision is as follows:

• As cryptocurrency is considered a CGT asset, the investment will trigger a capital gains tax event if the sale of units attracts a profit. Conversely, a capital loss event will commence if unit sales attract a loss.
• The costs involved in trading crypto are not classified as a tax deduction, thus should instead be accounted for in the asset's cost base.

It is also worth noting that if the SMSF disposes of cryptocurrency while the members are in the pension phase, capital gains incurred will be exempt from tax (Transfer Balance Cap dependant)

Trust Deeds and Investment Strategy

As cryptocurrency is an asset, the SMSF must ensure that investments in digital currencies are allowable in the trust deed. Trustees of the fund may need to have an amendment to their trust deed prepared or possibly execute an entirely new deed.

Many trust deeds will have a clause that permits the SMSF to 'invest in any other type of asset permitted by the SISA & SISR'. If this is relevant to your SMSF, you will not require an update to your deed as cryptocurrency is a permitted investment for SMSF's.

When reviewing the fund's investment strategy, this will need to be monitored and, where required, updated to ensure cryptocurrency has been acknowledged. 

Additionally, the volatility of crypto will require the SMSF to consider the relevant risks & liquidity associated with investing in the asset.

Valuations

SMSFs must ensure all asset values adhere to SISA and ATO Guidelines. Due to the daily change in value that cryptocurrency experiences, the ATO have confirmed an acceptable valuation method is to obtain the 30 June market value from a reputable digital currency exchange that publishes historical cryptocurrency values (i.e. CoinSpot)

Confirmation of Ownership

A wallet is a digital storage address investors use to trade and store their cryptocurrency. 

To satisfy separation of asset requirements under Reg 4.09A of the SIS Regulations, an SMSF needs to have its wallet entirely separate from any personal crypto wallets.

To further complicate this, wallets are entirely virtual and are only identifiable via an IP address. Difficulty can arise with having the investment registered in a particular name, including in the name of an SMSF. 

Ensuring all trade movements within a crypto wallet match transactions within the SMSF's bank account is vital in demonstrating the link between the SMSF and the wallet. Further measures may include signing a declaration of trust which states that the SMSF is the beneficial owner of the cryptocurrency.

Purchase from a related party?

Section 66 of the SIS Act prohibits SMSF's from intentionally acquiring an asset from a related party, with only a few exceptions. The ATO has ruled that the exemption assets do not include cryptocurrency, and thus SMSF's cannot acquire this type of asset from a related party.

Summary

As we have witnessed with some cryptocurrencies to date, it can be a viable investment option for SMSF's looking to grow member retirement benefits exponentially. However, without adequate planning, the fund can be exposed to significant losses. 

Ensuring an SMSF has ticked off all requirements for investing in cryptocurrency is key to avoiding the ATO's radar – don't make the same mistakes others likely will! 

If you'd like to learn more, get in touch! Click here.