Cryptocurrency is an allowable investment in an SMSF, however there are important considerations when investing in any asset in an SMSF to make sure that the investment is compliant and does not contravene the legislation and is compliant for ATO and audit purposes.
The following must be considered when investing in any asset in an SMSF:
* Compliance with governing rules
* Ownership and separation of assets
* Storage (if applicable)
* Insurance (if applicable)
* Any Investment in an SMSF must satisfy the sole purpose test: that is, to provide retirement benefits to members.
Subject to the complying with the Trust Deed, the Investment Strategy and the SIS Act an SMSF can invest in Cryptocurrencies like Bitcoin, Ethereum, XRP, Litecoin and Dogecoin.
Investment strategy and a fund’s governing rules
The ATO states “An SMSF’s investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in cryptocurrency, SMSF trustees and members should consider the level of risk of the investment. Trustees and members may then review and if necessary, update their fund’s investment strategy to ensure the investment being considered is permitted.
Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed.”
Consideration should also be given to diversification of assets within the SMSF.
Ownership and separation of assets
An SMSF is required to ensure the fund’s assets are held separately from Trustees/members assets.
Follow this guide from finder.com.au:
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 (https://www.finder.com.au/cryptocurrency/wallets) .
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:
Many Australian cryptocurrency exchanges (https://www.finder.com.au/cryptocurrency/exchanges), such as CoinSpot (https://www.finder.com.au/coinspot-exchange-review), offer SMSF accounts to customers.
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.
SMSFs must ensure their investments are valued in accordance with ATO valuation guidelines. For the purpose of calculating member balances at the 30th of June each year the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.
Related party transactions
Finally, cryptocurrency is not an asset that can be transferred from a related party so exercise caution in this regard.
As an SMSF expert we have set out the rules for holding cryptocurrency in an SMSF. We are not recommending investing in cryptocurrency and we are not licensed to give investment advice. Please do your own research, consider the risks and obtain investment advice from a licensed professional before proceeding. We are not endorsing any providers mentioned in the article, please do your own research. We are providing general information only. We have not taken into account your personal circumstances or objectives.