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 critical to the success of any long-term financial plan. Choosing the right superannuation strategy, however, can be difficult — Australian investors are presented with many options, such as industry funds, retail funds, corporate funds, public sector funds – and now the crypto SMSF.

While these options are suitable for a broad range of retirement planning approaches, none of the retail funds provide investors with the ability to take direct control over the specific investment strategy that will allow them to accumulate sufficient retirement capital.

Self managed super funds, or SMSFs, do exactly this — an SMSF allows an investor to take direct control over their investments and financial future, executing their own superannuation strategy. Establishing and managing your own SMSF can be a complex process, as there are many regulatory requirements that must be met.

A self managed super fund demands careful research, planning, and in-depth due diligence. The biggest advantage of an SMSF, however, is that it allows investors to 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?

A self-managed super fund, or SMSF, is a private superannuation fund operated by individual investors. Like any SMSF, a crypto SMSF are regulated in part by the Australian Taxation Office (ATO), ASIC & APRA. Crypto SMSFs are legal tax structures that are specifically designed to accumulate funds for the retirement of an individual. It’s important to note that all SMSFs, including crypto SMSFs, are subject to close scrutiny from these regulatory bodies.

An individual that chooses to operate a cryptocurrency focused self managed super fund must possess sufficient financial experience and capabilities in order to ensure that they are able to make sound financial decisions.

Importantly, individuals that operate SMSFs must demonstrate that they are able to 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 begin with a decision — investors must decide on 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 more insight into the options presented by both structures, which vary based on costs, ownership of assets, membership requirements, and penalties.

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 a crypto SMSF 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. Once a crypto SMSF receives classification as an Australian super fund, the SMSF is registered and registers an ABN.

Once the SMSF is registered, the SMSF needs to set up a bank account and establish an exit strategy. When 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

Note that it’s important to engage online 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.

It’s important to note that it’s not mandatory to operate just one superannuation fund. Investors may choose to create multiple superannuation funds, establishing a crypto SMSF in addition to an industry or retail super fund as part of a diversified retirement investment strategy.

Crypto SMSF Regulation

While the crypto SMSF is legal and 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 me 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

All cryptocurrencies held by SMSFs are taxed on a capital account — cryptocurrency assets by a crypto SMSF are not subject to capital gains or losses when sold. Any trading fees or commissions associated with the purchase or disposal of cryptocurrencies by a crypto SMSF are considered to form part of the cost based of the asset, and can’t be claimed as a deduction.

Key Takeaways

Cryptocurrency self managed super funds are relatively complex, but provide investors with the ability to manage their own retirement strategy. When establishing a crypto SMSF, it’s critical to ensure that you’re wholly 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.

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