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
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.
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:
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:
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).
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:
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:
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.
Under superannuation laws, your SMSF investment strategy must take into account the following:
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.
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.
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.
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.
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.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
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:
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.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.