Bitcoin – also known as cryptocurrency, or ‘crypto’ – has become a talking point for self-managed superannuation funds (SMSF’s) to acquire.
Let’s be clear from the start. Crypto is a speculative investment that has been subject to wild fluctuation. So, should you even have it in your fund? Indeed are you even allowed to? How does it work?
You should firstly confirm your fund’s trust deed authorises investments in cryptocurrencies. Most deeds wouldn’t explicitly mention cryptocurrencies, but the more modern deeds allow investing in anything an individual can, which includes cryptocurrencies. Trust deeds vary greatly, so each trustee needs to check their fund’s deed.
Next, the investment strategy needs to permit cryptocurrency investment. In many cases, the investment strategy will need to be updated to authorise cryptocurrency investing. By its nature, cryptocurrency investment is speculative. Given that, it is up to the trustees of the fund to formulate an investment strategy that includes such assets.
To acquire the cryptocurrency, the fund will probably need to open an account at an exchange. Some Australian crypto exchanges allow you to open an account in the name of a SMSF. The usual process is then for the SMSF to send AUD from its bank account to the exchange and then make a buy order. Some exchanges only have a limited number of cryptocurrency available (e.g. bitcoin, ether, bitcoin cash). If the SMSF wants to purchase a lesser-known crypto, then it’ll probably need to acquire one of the cryptos available on the exchange and then use an overseas-based exchange. Overseas exchanges tend to offer more crypto.
Some people are acquiring hundreds of thousands of dollars worth of crypto in their SMSF. Instead of using an exchange, there are businesses offering Over The Counter (OTC) services to acquire and store crypto. This is typically only for the major crypto. These OTC services charge something like a 3-5% fee to acquire large sums of crypto, and then offer a service to securely store the crypto in safety deposit boxes. They can also arrange the necessary documentation to substantiate purchases and the end of year value and holdings for audit purposes.
Note that a SMSF cannot purchase cryptocurrency from its members.
Once the crypto is acquired, the trustee is responsible for securely storing the crypto. There is no one size fits all solution. There have been many stories of exchange hacks and scams, so generally, it isn’t a good idea to keep crypto on an exchange. Two common options are to use a ‘hardware wallet’ or ‘paper wallet’. To use a hardware wallet, the SMSF would need to purchase a hardware wallet – like a hard drive – and store the crypto on it. Importantly, your fund must keep this crypto separate from personal holdings. The other option is to use a paper wallet and store this in a safe place.
The trustee should also consider whether to insure the crypto. Over The Counter businesses may be able to arrange this.
At year-end, the crypto must be valued at its market value in order to prepare the financial statements. The trustee needs to obtain evidence of its holdings and the value. This can include a screenshot of the wallet interface displaying the holdings. The value of the crypto can be calculated by referring to the market price from a reputable exchange.
The more trades the SMSF does, the more onerous the record keeping.
There is extreme price volatility in crypto, and so the trustee of a fund should review their crypto investment decisions to determine whether they are prudent. It is a speculative investment and a gamble.
So, if you want crypto in your fund, remember – all superannuation funds, including self-managed super funds, need to be for genuine retirement purposes. That would generally mitigate against investing in speculative assets that may disappear entirely. Ultimately these financial decisions are your responsibility as a trustee.
Talk to Philip Ruth at GNS Group for more information on the SMSF and audit requirements of Cryptocurrencies.
Next time – TBAR reporting – what is it and will you be affected?