Cryptocurrencies are probably the greatest gift of technology to the world of investment. Well, probably side-by-side with fintech.
Cryptocurrencies, such as bitcoin, may seem like all the rage right now, but they’re expected to become the norm in our global financial landscape over the long-term. So, it’s not surprising that a lot of people are now opting for cryptocurrency investments to feature in their SMSF’s portfolio. This may come as a shock, but it seems more and more people are feeling far more comfortable about cryptocurrency investment.
But it can be a bit of a high risk, high return situation.
Cryptocurrency is generally a riskier investment so it’s not exactly for people who are taking their first step to enter the world of cryptocurrency or SMSF.
As cryptocurrency tax compliance specialists, our advice is to get reliable assistance from professional accounting firms whose technical knowledge you can rely on. The last thing you want is a provider who doesn’t fully grasp the complexity of such an exciting investment space.
Ok, so here’s what you need to know.
Step 1: What’s in your SMSF Trust Deed?
First things first - you need to check if your SMSF Trust Deed allows for cryptocurrency. Read the deed carefully. If it’s an older deed, you may need to update it first before you move on to step 2.
Step 2: Include cryptocurrency in your SMSF investment strategy
You need to include cryptocurrency in your investment strategy. This includes justifying why this is a suitable investment for the members of the SMSF fund and how it addresses their investing preferences and risk profiles.
For example, a member in the pension phase will usually be more comfortable seeing consistent returns and taking a more conservative approach. Cryptocurrency may not be the right fit. But a younger person may have a higher risk appetite. Either way, cryptocurrency must be allowable by the SMSF’s trust deed in the first place.
As for the required ‘sole purpose’ test, you should make sure you keep your personal assets completely separate from the SMSF assets; in this case, a separate digital currency exchange account and a separate hardware wallet for your SMSF
Step 3: Know the tax implications of cryptocurrency
Before you get the ball rolling on your cryptocurrency investment, here’s what you need to know about the tax treatment for an SMSF:
Cryptocurrency is regarded as a capital asset when it comes to capital gains tax (CGT) purposes. This means that CGT is triggered when your SMSF sells cryptocurrency to buy AUD or another cryptocurrency.
If the fund has held the cryptocurrency for longer than 12 months, the CGT tax rate is 10%
However, if the fund has held the cryptocurrency for less than 12 months: the CGT tax rate is 15%
Step 4: Understand the tax reporting obligations for cryptocurrencies
SMSF investments in cryptocurrency must be valued at the fair market value on 30 June and this value needs to be reported to the ATO each financial year.
Now, you may be wondering, where do you get that value amount?
It comes from a cryptocurrency exchange that reports the historical value of that specific cryptocurrency. The 30th of June closing value is what you need. The market value of cryptocurrency assets is reported under item 15c of your SMSF tax return.
It’s really important to get this right. At Kova Tax, we have seen serious compliance mistakes where professionals have misstated cryptocurrency under the wrong asset class, which causes all kinds of problems.
Ok – so here’s how to use your SMSF to invest in cryptocurrencies.
Step 5: Choose a quality Australian exchange or cryptocurrency broker.
Although there are plenty of options out there, you definitely want to find the best one for you. There are so many cryptocurrency brokers and cryptocurrency exchanges out there that allow you to invest in cryptocurrency with your SMSF - but they’re not all the same.
Do your research first!
To begin, you must register as an SMSF (not an individual). So, you should look for a provider that supports the registration of SMSF entities. Otherwise, you can easily breach the sole purpose test.
Another thing to look for in a quality exchange is great record keeping; they must provide comprehensive reporting for SMSFs. For tax and audit purposes, it’s important to have these records available to process your transactions, such as:
A complete history of your transactions on their platform
Balances and values of your portfolio at the end of every financial year
Account statements available as a PDF, and data exports available in CSV format.
Feeling a little lost? Here are some well-known providers in Australia:
We do not recommend engaging with an overseas provider because their reporting and record-keeping standards are likely to be different than what is required for an Australian SMSF. You may not pass an SMSF audit due to the lack of documentation.
Step 6: Sign-up
Once you have decided which provider to use, you will need to sign-up with them.
Don’t worry – their platform will guide you through this process and will ask you to provide ID documents, as well as a copy of your signed and executed SMSF trust deed.
Step 7: Transfer funds
Now that your account is set-up, transfer funds from your SMSF bank account to your chosen cryptocurrency provider. Don’t send the funds from a personal bank account!
Step 8: Use a hardware wallet
A hardware wallet is a physical device that’s used to store cryptocurrency in a secure place - unlike a software wallet which is generally less secure. Depending on the security preference of the SMSF, it may also be suitable to store the cryptocurrency on an exchange or other custody service.
Always make sure that you purchase the hardware wallet using funds belonging to the SMSF. This way, there is no argument regarding the ownership of the assets. Also, keep a copy of the tax invoice, which should have the name of your SMSF.
Step 9: Record-Keeping
While cryptocurrency is very modern and future-forward, good old-fashioned record keeping is still required. It’s one of the key elements of compliance and you must keep your SMSF records for at least five years!
We recommend exporting your cryptocurrency transaction history for all trades, withdrawals, deposits, and other events. You must also have your cryptocurrency balances and market value on the 30 June each year.
Step 10: Keep checking in before taking action
Always check in with your SMSF compliance team first before you conduct a new kind of cryptocurrency transaction in your SMSF. You may get excited, but you just want to make sure that every move is in your best interest. For example, you can't just start withdrawing a pension in cryptocurrency as it must be in cash. Cryptocurrency is not considered a currency, but a new property asset class.
How can Kova Tax help you with SMSF and cryptocurrencies?
If you are new to the cryptocurrency space and want to invest in cryptocurrency under your SMSF, it’s important you do your own research first and trust only the experts to handle its compliance.
At Kova Tax, we are a tech-driven accounting firm specialising in cryptocurrency and SMSF compliance.
For only $330 (which is tax-deductible for your SMSF), we’ll provide a bespoke and informative consultation to set your SMSF up for success. Our cryptocurrency specialists will make sure your SMSF with crypto investments is compliant and your tax rate stays at 15%!
When it comes to cryptocurrency investment, don’t leave it up to assumptions or guesses. You can trust the Kova Tax team to ensure you’re compliant when it comes to your SMSF investing in cryptocurrency.
Speak with us today!
This article is general commentary on a topical issue and does not constitute tax, legal or financial advice. Anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the applicability of the information to their particular circumstances. All content was correct at the time of publishing.
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