Cryptocurrencies and SMSF Factsheet
SMSF practitioners and auditors have hit a brick wall on whether it is a sound approach to allow clients to invest in such assets.
There has been an increasing number of SMSFs investing in cryptocurrencies (crypto-assets or crypto) like Bitcoin and Ethereum. However, the value of cryptocurrencies can change constantly and abruptly, thus making crypto a high-risk investment. Yet, despite the uncertainty and risks surrounding cryptocurrencies, the legislation allows SMSFs to invest in such assets. If you are also considering investing your or your clients’ hard-earned retirement money on cryptos, read our Cryptocurrencies and SMSF Factsheet. We’ve rounded down 8 basic facts you need to know before adding crypto to your or your clients’ portfolio:
1. Crypto is not considered money in Australia
Under the Currency Act 1965, the Australian dollar is the only recognised form of payment as the nation’s currency. However, several businesses have already begun accepting crypto as a mode of payment. Some ATMs even allow withdrawing cryptocurrencies to physical money. Moreover, some countries have already recognised cryptocurrency as legal tender, e.g., El Salvador, the United States of America.
Cryptocurrencies were designed as a digital form of currency, allowing payments through an electronic or online system. However, cryptos do not have intrinsic value, unlike national currencies, which are legislated as legal tender. Moreover, crypto does not have a regulated purchasing power, nor is it used to measure prices. Hence, despite being accepted as payment for goods and services, crypto is still not considered money.
2. Crypto can trigger capital gains tax consequences
Under the Australian taxation laws, cryptos are considered capital gains tax (CGT) assets and you need to pay taxes when trading cryptocurrency. For businesses buying or selling cryptocurrency, gains and losses from the transactions are treated as capital gains and losses, respectively. Hence, when crypto is sold at a profit, then a capital gain is realised. On the other hand, if it was sold at a loss, then it will incur a capital loss.
The tax consequences of a capital gain from the crypto investment depends on how long the asset has been held. Cryptos held for less than 12 months are taxed at 15%, while those held longer are taxed up to 10%. Moreover, ATO will also consider whether the crypto was held in the pension phase or accumulation phase. For example, crypto currencies sold when the SMSF is already in the pension phase will be exempt from tax consequences.
3. Crypto investments must be allowed in the Trust Deed
While legislation allows SMSFs to invest in cryptocurrencies, the fund’s trust deed must first authorise the investment before it can proceed. Moreover, crypto investments must align with the fund’s investment strategy. More importantly, such investments must comply with SISA and SISR regulatory requirements.
Before investing in cryptocurrencies, SMSF trustees should first review the investment provisions of the fund’s trust deed. They must ensure that cryptocurrencies are approved investments, and amend the SMSF trust deed, if necessary. In addition, the fund’s investment strategy should have a statement relating to the acquisition of the crypto investment. The statement should also include the range of fund assets that will be used to acquire the investment.
Other considerations are how the crypto investment will meet SMSF’s retirement goals and the risk appetite of the members. Also, think about the fund’s diversification and liquidity, and if it can discharge its liabilities. More importantly, trustees must seriously decide on whether investing in cryptocurrencies is prudent.
4. Crypto Wallets should be in the name of the SMSF
Because cryptocurrencies are virtual currencies, they are stored in a digital wallet. The digital wallet is stored either on a software (hot) connected to the Internet or hardware (cold) which is run offline. However, instead of monies, the virtual wallet will store a collection of public and private keys.
The public key or password acts as the wallet’s address (IP address). The address is like a bank account number and is where the crypto is received or sent from during exchanges. Meanwhile, a private key, or PIN, verifies the owner of the cryptocurrency and is used to authorise transactions. The wallet’s private key and password are known only by the user who set it up and must be stored securely.
For SMSFs to remain compliant with super laws, trustees and members must ensure it has exclusive ownership of its assets. Hence, when setting up the cryptocurrency wallet, they must ensure that the account is under the name of the SMSF. Moreover, they must make sure the crypto investment is managed separately from personal and business assets. Thus, the cryptocurrency wallet must be entirely different from the wallets of the fund’s trustees and members.
5. Cryptos create an SMSF audit risk
From an SMSF audit perspective, cryptocurrencies present a risk to auditors because of its non-tangible nature. Unlike listed shares, crypto transactions do not have a tangible audit trail necessary for auditors to track. Hence, SMSF auditors must search for relevant audit evidence to confirm whether the crypto investment exists and the transactions relating to exchanges. This includes:
- Account verification – the account must be owned by the SMSF. Specifically, the virtual wallet for the cryptocurrency must be legally owned by the SMSF and not one of the trustees. More importantly, SMSF auditors must confirm the wallet address and if it is used wholly and exclusively by the SMSF.
- Holdings balance confirmation – SMSF auditors must reconcile the balance of the crypto wallet with fund’s bank account as at the end of each financial year. Moreover, they will need to confirm the type of cryptocurrency, units held, and market value. Cryptocurrency prices are highly volatile and market value may change dramatically.
- Transaction confirmation – cryptocurrencies must be purchased from third-party vendors using cash from the SMSF bank account. Acquiring cryptocurrencies from related parties, e.g., member, trustee, relative of a member or trustee, is against SMSF laws. Moreover, super laws prohibits trustees and members from gifting or selling assets to their SMSF – including crypto investments. Hence, SMSF auditors will be looking out for exchanges using the SMSF bank account.
6. Trustees should keep proper records of Crypto Investments
To audit crypto investments, SMSF auditors will be looking at:
- Whether the cryptocurrency was purchased using the SMSF bank account
- Confirmation that the SMSF is the beneficial owner of the cryptocurrencies wallet and not any of the trustees or members
- Whether the trading history for the wallet matches the transactions from the SMSF bank account
- SMSF Minutes relating to the exchange of cryptocurrencies
- Correspondence between the fund’s accountant and financial planner relating to the cryptocurrency investment
- Investment records of up to 5 years of transactions – purchase, holding and sale of cryptocurrencies. This includes:
- The type of cryptocurrency and its purchase or sale price in AUD$
- Date and time of transaction
- The quantity of purchased or sold cryptocurrency
- Costs and fees related to the purchase or sale
- The exchange records for each transaction
- Any software costs incurred during the transaction
Virtual wallets can only be identified and accessed using an IP address – online. Moreover, trustees are responsible for downloading the transaction records from the wallet to verify any gain or loss. Hence, it can be difficult for SMSF auditors to track the transactions online if trustees did not access the transaction reports.
Most crypto exchanges like Coinspot do provide a detailed audit trail for SMSF’s, and this is worth considering if you are using an exchange as in Point 8 further below.
7. Crypto scams are increasing
The cryptocurrency system allows user-anonymity and has no central data bank for storing user information. Moreover, cryptos are not commonly recognised as financial products, and the platforms for trading them may not be regulated by ASIC. Hence, if the crypto wallet is hacked, or the system gets corrupted, investors might lose all their money and not receive any protection.
In addition, crypto scams are increasing. Currently, there are two types of crypto scams:
- Fake opportunities to buy crypto – some tactics include:
- promises of very high returns
- endorsements from celebrities or even government agencies
- people who contact you through social media or text messages
- using dating apps to establish a romantic connection and gain trust
- multiple or constantly changing bank accounts used for transfers
2. Using your own crypto to invest or pay for something – some tactics include:
- quick and easy returns with tax-free benefits
- high returns
- options trading or foreign currency trading
- commissions for getting others to invest
- no risk or low-risk opportunity because you:
- can sell anytime
- will get a refund for non-performance
- have insured or guaranteed transactions
- can swap one investment for another
- inside information on initial public offerings
- discounts for early bird investors
8. SMSFs should use an Australian-based Exchange
If you or your client decides to invest in cryptocurrencies, you must first establish a trading or exchange account in the name of the SMSF. However, due to the complexities of trading with an overseas or foreign exchange, you should consider having only an Australian crypto exchange. Moreover, transactions made using foreign crypto exchange may lead to incurred taxes in other countries.
Currency movements with foreign crypto exchange accounts can also pose an issue, as they might not be familiar with SMSFs. Hence, if you set up a foreign-based exchange, they might hold the account under the trustee’s name instead of the SMSF. Doing so is against SMSF laws and regulations and could lead to compliances issues.
Summary
SMSF trustees have legal obligations and responsibilities over how their fund is administered. In addition, there are several rules governing cryptocurrencies and investments made with SMSF. Hence, trustees must consider the requirements and risks before using their fund to invest in cryptos. Getting professional advice from a licensed financial adviser might help trustees make the best decision over their retirement money.
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