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Investing in crypto assets: the challenge for SMSF trustees

There has been a concerted effort from the ATO to warn taxpayers of the risks associated with investing in crypto assets for some time now. Recently, those efforts have been brought into sharper focus by the collapse of the FTX trading platform and ASIC’s subsequent suspension of the Australian subsidiary’s Australian Financial Services Licence.

Assistant Commissioner Tim Loh’s video series ‘Crypto myth busting with Tim Loh’ foreshadowed some of the misconceptions surrounding the crypto asset market and important considerations for taxpayers. The warning bells sounded in that series have been expanded upon in recently published guidance directed at SMSF trustees.

This article summarises the new guidance and provides some high level considerations for all SMSF trustees to consider regarding the regulatory and tax responsibilities associated with investing in crypto.

Olivia Smedley, Maddocks Lawyers

ATO guidance on investing in crypto

Crypto assets (crypto) are a digital representation of value that you can transfer, store or trade electronically. This also includes non-fungible tokens or ‘NFTs’.

The ATO advises that everyone keep records for every crypto transaction, as you will have tax responsibilities for every crypto transaction. A crypto transaction is any purchase, sale or disposal of crypto.

Reporting crypto transactions

In the same way you would need to consider capital gains tax (CGT) where there is a disposal of shares, the ATO prescribes that you also must report a disposal of crypto for CGT purposes.

Disposals of crypto include:

  • exchange one crypto asset for another;
  • trade, sell, gift or donate crypto assets;
  • convert crypto to a fiat currency (e.g. Australian dollars).

Where you receive a ‘staking reward’, the ATO considers that you will also have received ordinary income equal to the money value of the tokens at the time you receive them. You will also be considered to have received ordinary income if you receive the reward for either:

  • participating in ‘proxy staking’; or
  • voting your tokens in a consensus mechanism.  

The ATO has published its determination TD 2014/27, confirming that Bitcoin (a cryptocurrency), when held for the purpose of sale or exchange in the ordinary course of a business, is trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Accordingly, Businesses may need to account for transacting in crypto as trading stock or ordinary income. For the purposes of calculating any ordinary income, the proceeds of disposing the crypto less the cost base will for the ordinary income or a deductible expense (as applicable).

Keep records  

The ATO may require you to provide records and/or evidence of a crypto transaction for up to 5 years. Accordingly, it recommends that you must hold records for 5 years after a crypto disposal. Ways you can keep accurate records include:

  • creating/using a spreadsheet to record any transactions in crypto; or
  • scan or screenshot digital copies of your records to make it easier to store and access them.

What should SMSF trustees think about before investing in crypto?

As trustee of a SMSF you’re ultimately responsible for protecting the fund’s assets and investments and acting in the best interests of all SMSF members. So when you’re investing in crypto, you need to ensure any investment complies with the applicable superannuation and tax laws.

Before a trustee invests in crypto on behalf of a SMSF, it must ensure that:

  • the SMSF trust deed allows for investment in crypto; 
  • any investment is made in accordance with the fund’s investment strategy; and
  • it has considered the risks associated with investing in crypto.

Who is the owner?

As you are acting in your capacity as trustee, its important to make sure that the crypto is owned by the SMSF and are held separately from your personal or business assets. The SMSF should have its own digital wallet, and this should not be used by you for any personal or business transactions.

What should a SMSF Investment Strategy include?

Under superannuation laws, your SMSF investment strategy must take into account the following:

  • risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements;
  • composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification;
  • liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses);
  • fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs;
  • whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.

Other regulatory considerations

The ATO publishes valuation guidelines, and any crypto investment will be valued at market value in accordance with these guidelines.

A member of a SMSF should not sell or transfer their crypto to the fund for consideration.

Things to remember about crypto

There are serious and material risks

Investing in crypto is inherently risky as the latest developments involving FTX demonstrate. Not only is the value of different digital assets volatile, but the lack of regulation leaves the participants in the surrounding systems materially exposed to the activities of bad faith actors.

It’s not anonymous

Where crypto interacts with ordinary financial transactions, it will leave records and ‘electronic tracks’.

Often crypto is thought as ‘anonymous’, however where there is a disposal of crypto as outlined by the ATO, the ATO is provided this information in accordance with data matching protocols and it may notify you that you have tax obligations as a result.

Declare it, no matter the gain

It doesn’t matter how much the capital gain, you must declare it. All capital gains must be declared where there is a disposal of crypto. When the total of all your capital gains are over $10,000 you will be required to complete a CGT schedule as part of your tax return.

Check the trust deed first.

Like any investment by a SMSF, the SMSF trustee will only have the power to invest in crypto if the SMSF trust deed contains provisions that allow for investing in crypto.

You may need to update your SMSF deed to allow for investing in crypto, and also should consult super industry regulatory requirements concerning investment restrictions. Cleardocs have an ‘Update to SMSF’ product available for purchase on its website which includes the necessary provisions to allow your SMSF to start investing in crypto.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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Lawyer in Profile

Paul Ellis
Paul Ellis
Special Counsel
PH: 61 3 9258 3524

Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.

Paul's key areas of practice include:

  • Australian Consumer Law;
  • credit and securities law;
  • commercial law and contracting;
  • government contracts; and
  • trust and superannuation law.

Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.