Accounting & Tax, Crypto Tax

Crypto SMSF: How Does It Work?

SMSF Crypto

The crypto SMSF allows investors to integrate digital assets into their retirement strategy — but how do they work?

A robust superannuation investment strategy is one of the most fundamental elements in the success of any long-term retirement plan. Choosing the right superannuation fund and strategy for you, however, can be difficult. Australian investors are presented with a dizzying array of funds and options- industry funds, retail funds, corporate funds, and public sector funds, and within each of these fund types there are different underlying funds and different investment portfolios.

While the majority of the afore-mentioned options are suitable for a broad range of retirement planning approaches and risk profiles, what do investors with a higher tolerance for risk exposure and more financial awareness do? Retail funds don’t generally provide investors with the ability to take control over their individual investments, as these funds have various different types of investment managers who drive the strategy, and fund investment decisions.

A self managed super fund (“SMSF”) allows an investor to take direct control over their investments and execute their own superannuation strategy. However establishing and managing your own SMSF can be a complex process, as there are many regulatory requirements that must be met.

An SMSF requires careful research, planning, and in-depth due diligence, as well as ongoing annual monitoring and auditing. An SMSF is a complex investment vehicle that is not appropriate for everyone due to the high running costs and compliance demands.

There are advantages to having an SMSF however, the biggest of which is generally considered that it allows investors to be more in the investment driving seat and execute far more flexible investment strategies — including investment strategies focused on digital assets and cryptocurrencies.

Ensuring that you’re compliant when establishing your own crypto SMSF can be a difficult process. While the ATO explicitly allows for cryptocurrency investments by a SMSF, there are many tax considerations that must be understood before getting started.

What is a Crypto SMSF?

An SMSF is a private superannuation fund operated by individual investors and regulated in part by the Australian Taxation Office (ATO), ASIC & APRA. The “sole purpose” of an SMSF is to provide retirement benefits to its members, or to the dependents of the member(s) should the member(s) die before retirement. SMSF assets and investments can’t be mixed with personal assets, as doing so would breach the sole purpose of the SMSF (“sole purpose test”).

Crypto SMSFs are just like SMSFS in that they are also legal tax structures that are specifically designed to accumulate funds for the retirement of an individual, however a crypto SMSF is an SMSF is where the members have elected to invest cryptocurrencies in their SMSF. Owing to the added volatility risk and financial complexity it is generally recommended that any individual who chooses to operate a cryptocurrency focused SMSF should possess sufficient financial experience and capabilities in order to ensure that they are able to make sound financial decisions. If unsure, consulting a financial adviser or accountant familiar with both cryptocurrencies and SMSFs is advisable.

In addition, SMSFs are relatively costly to set up and maintain. It is important that individuals interested in starting SMSFs can account for the expenses associated with operating an SMSF, such as financial, legal, tax, accounting, and auditing. Record keeping is critical when operating a crypto self managed super fund — all self managed super funds are audited yearly by dedicated SMSF auditors.

How Do I Set up a Crypto SMSF?

Setting up a crypto SMSF is a long, complicated process. If you’re not sure how to get started, it’s best to reach out to a financial advisory firm for detailed guidance.

The basic steps involved with setting up a cryptocurrency SMSF begins with a key decision in the structure of the fund. An SMSF can be structured with multiple individual trustees, or as a corporate trust. An SMSF can have up to four individual trustees, or a corporate trustee.

Determining whether your SMSF should have individual trustees or a corporate trustee is an important decision. The ATO guide to SMSFs provides useful insight into the options presented by both structures, which vary based on costs, ownership of assets, membership requirements, and penalties applicable should the SMSF, or Trustees, be found to be non-compliant with the relevant legislation.

Once investors decide on the structure of a crypto SMSF, eligible trustees must be appointed. Subsequent to trustee appointment, a trust deed and trust must be created in accordance with state or territory laws.
It’s essential that crypto SMSFs acquire classification as an Australian super fund. This allows the crypto SMSF to function as a compliant super fund, and receive the important tax concessions that make it suitable for retirement investment vehicle. Once a crypto SMSF receives classification as an Australian super fund, the SMSF is registered and the next step is to register the SMSF for an ABN. In addition the SMSF needs to set up a bank account and establish the most appropriate exit strategy for the fund should an exit strategy be required.

Once this process is finalized, the crypto SMSF is considered operational and valid. From start to finish, the process of creating a crypto SMSF can take up to six weeks.

How Much Does it Cost to Set Up a Crypto SMSF?

Their are a number of costs associated with setting up a crypto SMSF:

Crypto SMSF Setup Fees:

  • Trust deed fees: Between $150 and $500
  • SMSF Sole Purpose Trustee Company setup fees: Between $665 and $1660

Crypto SMSF Recurring Annual Expenses:

  • ATO supervisory levy: $518
  • Annual ASIC corporate fee: $45

To ensure the SMSF is compliant it is important to engage up front, and annually, with the required accounting, administration, and auditing providers as well. For more information on the specific costs of these expenses, reach out to Fullstack for detailed guidance

What is the Minimum Investment for a Crypto SMSF?

In order to determine the minimum investment for a crypto SMSF, it’s necessary to do some math. ATO annual SMSF statistics indicate the annual positive return on assets is 2.9 percent — given the average annual operation cost of an SMSF at $1878, a SMSF would need to open with a balance of $65,000 to break even.

In order to reach positive return rates, a SMSF would need to invest at least $130,000. A more accurate standard for SMSF minimum investment was determined to be at least $200,000, published by the ASIC in 2013.

The highly volatile nature of cryptocurrency SMSFs, however, makes determining the minimum investment amount difficult. During the 2017 cryptocurrency bull market, crypto SMSFs reported returns in excess of 600 percent — market movement throughout subsequent years, however, has brought these returns down significantly.

Investors may choose to create multiple superannuation funds, and establish a crypto SMSF in addition to an industry or retail super fund as part of a diversified retirement investment strategy. Consult your financial planner or tax accountant regarding superannuation cap limitations.

Crypto SMSF Regulation

While the crypto SMSF is a legal entity recognized by the ATO, the office provides explicit guidelines on what is and isn’t acceptable when it comes to cryptocurrency based self managed super funds. Tax determinations published by the ATO in 2014 clarified that cryptocurrencies are not money, but are capital gains tax assets. This determination makes it possible for SMSFs to invest in cryptocurrency in the same way they would invest in any other permissible asset.

When investing in cryptocurrencies via a self managed super fund, there are a number of key obligations that must be met:

    • The fund’s trust deed must specifically allow for cryptocurrency investments
    • Any cryptocurrency investments must be performed in accordance with the investment strategy dictated by the fund
    • The Superannuation Industry (Superannuation) Act 1993 states a number of regulatory requirements that concern investment restrictions — cryptocurrency investments made through SMSFs must comply with these requirements.

Investors establishing a self managed super fund must provide a breakdown in the application of regulation that details the fund’s investment strategy. This strategy outline must include:

    • The composition of the fund’s investments
    • Any risks involved in making, holding, and realising return from investments
    • Objectives and cash flow requirements
    • Investment liquidity

How Are Crypto SMSF Investments Stored & Secured?

Cryptocurrency is stored differently than traditional assets. Cryptocurrency assets held by crypto SMSFs must be separated from the assets held by fund members. The ATO is clear about the manner in which SMSF cryptocurrency assets must be held — the fund must be able to demonstrate that crypto assets are held in separate cryptocurrency wallets from those held by members and trustees.

To achieve this, cryptocurrency assets held by a crypto SMSF can be held in a hardware wallet, on the condition that the hardware wallet is dedicated to the purpose of storing crypto SMSF funds only.

Crypto SMSF assets must be valued in AUD, in accordance with ATO guidelines. The valuation of crypto assets held by a crypto SMSF must be calculated with the closing value of cryptocurrency published on a “website of a cryptocurrency exchange that reports on historical cryptocurrency values.”

How are Crypto SMSF Assets Purchased?

ATO related-party transaction rules for SMSF cryptocurrency assets prevent trustees or members from making direct in specie contributions of cryptocurrency to any of the cryptocurrency wallets that a crypto SMSF may operate.

When a fund needs to purchase cryptocurrency, purchases must be made with fiat currency contributed through the ATOs SMSF approved contribution methods. Any cryptocurrency purchased for the SMSF must be purchased through an exchange or brokerage that identifies the SMSF trustee as the owner of the account.

Crypto SMSF Tax Considerations

The ATO generally regards cryptocurrencies as an asset for the purposes of capital gains tax (CGT). If a crypto SMSF makes a capital gain from selling a cryptocurrency there may be a CGT obligation. As at February 2021 the CGT rate for SMSF assets that have been held for longer than 12 months is around 10%, and 15% for assets owned by the SMSF for less than 12 months. Any trading fees or commissions associated with the purchase or disposal of cryptocurrencies by a crypto SMSF are considered part of the cost based on the asset, and can’t be claimed as a deduction.

Key Takeaways

Cryptocurrency self managed super funds are relatively complex, but may provide investors with the ability to incorporate cryptocurrencies into their own retirement strategy should they wish. When establishing and maintaining a crypto SMSF, it’s critical to ensure that you’re completely compliant with all regulatory requirements.

If you’re in the process of establishing or running a crypto SMSF, ensuring you’re doing so in a compliant and effective manner can be difficult. For comprehensive tax guidance on crypto SMSFs, reach out to Fullstack today.

Disclaimer: The information provided above is general in nature, and as such it should not be relied upon for making decisions without seeking expert opinion or personal advice. Fullstack Advisory disclaims all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable, for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice provided. The user must accept sole responsibility associated with the use of the material in this article, irrespective of the purpose for which such use or results are implied. The information applies the law as stated at the time of writing, and is no substitute for financial advice.

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