In a recent update, SuperConcepts technical executive manager Graeme Colley said whether tax is payable by an SMSF depends on the circumstances; sometimes, it can be taxed just like any other income, taxed under the capital gains tax rules and at other times, it can be completely tax-free.

“It really comes down to the trustee and members and whether acquiring the cryptocurrency is consistent with the purpose of superannuation, the fund's investment strategy and the investment standards of the Superannuation Industry (Supervision) Act,” Mr Colley said.

“The taxation implications of an SMSF transacting with cryptocurrency depends on a number of factors, such as the purpose for which it is acquired or disposed of and the time it has been owned by the fund. One thing that's certain is for trustees to keep accurate records to support those transactions otherwise, it may end up with the fund paying more tax than it should.”

As cryptocurrency is treated as an asset for tax purposes, Mr Colley noted a capital gains tax event occurs if it is 'disposed of'. Disposal of cryptocurrency can occur if it is sold or given as a gift, traded or exchanged, including swapped for another cryptocurrency, converted by exchanging it for an official currency of a government, or used to acquire goods or services.

“In most situations, if an SMSF disposes of the cryptocurrency, then the whole or part of any capital gain made from the disposal can be taxed. The amount of the capital gain that is taxed depends on the time the cryptocurrency has been owned by the SMSF,” he added.

“If it has been owned for up to 12 months, then the whole gain will be taxable, but if it is owned for longer than 12 months, then two-thirds of the capital gain will be taxable. Of course, the proportion of any taxable capital gains that relate to income streams in the retirement phase will be tax-exempt in the SMSF.”

Trading or exchanging, and investment 

Trading or exchanging one cryptocurrency for another is treated as the disposal of one CGT asset and the acquisition of another CGT asset, according to Mr Colley.

“Because an asset (the cryptocurrency being disposed of) is being exchanged for another asset (the cryptocurrency being acquired), the market value of the cryptocurrency being disposed of and acquired is converted to Australian currency to calculate the capital gain or loss for tax purposes,” he explained.

“Some SMSFs buy and hold cryptocurrency as an investment with the intention to make a capital gain at its disposal. This will occur if the capital proceeds from the disposal are more significant than its cost base. A capital loss occurs if the capital proceeds from the disposal are less than the cost base of the cryptocurrency.

“If the cryptocurrency has been held by the SMSF as an investment for more than 12 months, it may be entitled to a one-third CGT discount, which reduces the taxable amount of the capital gain when the cryptocurrency has been disposed of. In the case of a capital loss, the capital gain is reduced, and if there is an amount of capital loss remaining, it can be carried forward and offset against the fund's future capital gains.”

Assessing different income outcomes on tax

There are times when cryptocurrency is treated as income and taxed in the SMSF, mainly if the fund is considered to be a trader rather than an investor. However, even if the fund is considered an investor, there are a few possibilities where the cryptocurrency received by the fund would be treated as income of the fund. 

This would include the SMSF being paid in cryptocurrency (as a substitute for cash such as rent for a property), staking rewards (similar to dividends) and Airdrops (similar to bonuses). This also includes DeFi interest (similar to bank account interest and referral fees (similar to the commission)

“Income tax is charged on the fair market value of the coins or tokens received by the SMSF," Mr Colley said.

"For example, if the SMSF received ether (ETH) which had a market value of $485 and was given in payment for the rent of a property, then the A$ value of the cryptocurrency received would be included in the assessable income of the SMSF. If the SMSF later disposes of the ether (ETH), then a capital gain or loss may arise."

For airdrops, the ATO considers that airdrops received from an established crypto coin or token are considered ordinary income at the market value of the tokens on the date they are received by the fund. Airdrops are akin to bonuses.

“An airdrop will consist of two tax events – the first is the amount that is considered assessable income, and the second is the capital gains tax event that will arise if the SMSF decides to sell or trade the cryptocurrency,” Mr Colley continued.

“For example, if the SMSF is airdropped coins or tokens with a market value of $200, it will be included in the fund's assessable income. In future, when the cryptocurrency is disposed of then, a CGT event will occur, and the cost base of the coins or tokens is accepted as their value when they were first airdropped to the SMSF.”

In some instances, signup and referral bonuses may be given in cryptocurrency for introducing users to a service, according to Mr Colley.

These are considered similar to the SMSF receiving a commission for the introduction, and the value of the coins at the time of receipt is considered to be the ordinary income of the fund. Disposal of the cryptocurrency in the future, then a capital gain or loss may arise.

For DeFi interest and staking rewards, Mr Colley noted it is possible for the trustees of an SMSF to lend the cryptocurrency, and payment for its use is made to the lender as DeFi interest, similar to interest on an investment, or staking rewards which is similar to dividends. These payments are assessable income of the SMSF and taxable.

“The SMSF may receive other payments which could arise from the activities being treated as carrying on a business,” he added.

“These may include buying and selling cryptocurrency as a trader, mining coins or tokens, or entering into options trading with cryptocurrency.”

What's not taxable

When examining what is not taxable, a good example is transferring crypto between the SMSF’s wallets.

“Moving cryptocurrency between different wallets or accounts held as trustee of the SMSF is not a taxable event and doesn't trigger a capital gain or loss. The reason is that there is no change in the owner of the cryptocurrency,” Mr Colley explained.

“However, it's important to keep a record of the movement between the different wallets to retain details of the cost base of the cryptocurrency, which will be used to work out whether a capital gain or loss has been made when it is sold, exchanged or disposed of by the SMSF. 

"The SMSF's digital wallet that holds the cryptocurrency may include different types of cryptocurrencies, and each cryptocurrency is treated as a separate asset for CGT purposes.”

 Furthermore, when a cryptocurrency changes its underlying technology, for example, if it goes from one provider to another, there are no tax liabilities for the SMSF as there is no change in ownership.  

“However, in some cases, there may be a change in the contract address, and the SMSF ends up with an issue of new coins or tokens and may also hold old coins or tokens, albeit at a reduced value,” Mr Colley continued.

“This split may be treated as a fork rather than a swap, and any may result in a CGT event occurring.”