Thinking of Investing in cryptocurrencies via your Self-Managed Super Fund?
It’s no doubt that in the last year cryptocurrency prices have been on a volatile ride. Even the most stable of cryptocurrencies, Bitcoin, which managed to fall in value by as much $2000 in one day in November last year has now gained more than 15% in the last week. Nevertheless, the popularity of cryptocurrencies continues to rise and with it comes the question of whether trustees of a Self-Managed Super Fund (SMSF) can and should invest in them.
Superannuation laws don’t stipulate what are permissible investments unless investing in related parties. Rather, they stipulate the need for SMSF trustees to devise an investment strategy taking into consideration diversification benefits, risk versus reward trade-offs and the level of liquidity required by the fund. Provided the cryptocurrency aligns with the fund’s investment strategy and is allowed under the fund’s trust deed, it is a permitted investment. However, in saying this there are several key considerations a trustee must consider before investing their SMSF monies into cryptocurrencies.
Is it allowed under the deed?
As outlined above, for any investment the SMSF deed must not preclude that investment from being made. A review of the deed will be important, whilst it may not specifically use the words cryptocurrency its worth understanding how a crypto currency would be classified. In the view of the ATO, cryptocurrencies are neither money nor a foreign currency. They essentially form part of a relatively new asset. For this reason, many trust deeds will not currently include a provision specifically allowing investment into this asset class.
Ownership and Separation
Cryptocurrencies are intangible assets that don’t physically exist. Of course, intangible assets can be owned if control over the asset can be proved. Typically, cryptocurrencies are purchased through an investor who transfers money into a digital ‘wallet’ which can then be used to purchase cryptocurrencies. At this stage, most cryptocurrency exchanges will only allow an account to be set up using the name and address of an individual. However, superannuation law stipulates that a fund’s assets must be held separately to personal assets. This includes ensuring the SMSF has clear ownership of the cryptocurrency. As crypto-assets continue to grow in popularity more exchanges are enabling SMSF to set up an account which will help alleviating the above issue.
Like all SMSF assets the trustee must ensure that the investment in cryptocurrencies is in accordance with the ATO valuation guidelines. For crypto-assets this value is the fair market value which can be extracted from any reputable exchange websites that publicly post their rates. Due to the volatility of these assets, for year-end purposes the ATO will accept the closing value on the 30th June.
Broadly speaking there are two different ways in which cryptocurrencies can be stored. Online storage involves the cryptocurrency being held in an online wallet typically with an exchange provider. The security of your exchange provider is paramount. If the exchange provider is hacked there is a potential your investment will be lost – there are many well documented examples of this occurring. The other option is cold storage whereby the wallet is held on a piece of hardware which is typically disconnected from the internet. The risk with this method is ensuring that the hardware does not get misplaced as this will result in your investment being lost.
Benefit payments and taxation
Once a trustee or member satisfies a condition of release, the SMSF can make a specified lump sum payment. However, all pension payments must be made in the form of cash. As previously mentioned cryptocurrencies do not fall under the classification of cash and thus the trustee and member must consider the impact of any capital gains or losses when the investment is sold.
As has been shown of late, the value of cryptocurrencies can fluctuate widely and rapidly. Trustees and members must be aware of the value of the member’s interest in the fund to ensure superannuation caps are not breached. Sharp rises in the value of a cryptocurrency may result in the balance being over the cap preventing the member from making any further non-concessional contributions to the fund.
The above are a few considerations trustees need to make, it is not a straight forward process to invest in the many cryptocurrencies. The auditor of the superfund will also need to be able to audit the crypto currency held, accordingly clear documentation will be required of the above items will need to be retained.
Should you have any other questions in relation to complying with investment rules in your SMSF please contact your engagement partner on 02 9283 1666.