Holders of a self-managed super fund (SMSF) have no doubt been looking closely at crypto news and the digital assets space. Is it time to start adding Bitcoin or Ethereum to the mix? Digital assets are maturing, and more Australians are becoming curious about the crypto space. As it turns out, SMSFs can be a great gateway into the crypto marketplace.
More and more trustees are turning to the aforementioned SMSFs in order to manage the various complexities of investing in digital assets. With proper support, it can become a legitimate, tax-efficient addition to your superannuation strategy. Having the proper information can take you from monitoring crypto prices into a more efficient realm when it comes to the digital assets space.
What is a Self-Managed Super Fund?
To put it simply, an SMSF is a private superannuation fund that can not only be established but managed by you as well. You can also bring in other members to manage the fund (up to six), with each member acting as a trustee to the fund. Each trustee is responsible for making that the fund complies with tax and superannuation laws while also making investment decisions on behalf of that account.
Key Features
Perhaps the biggest feature to be aware of is the control offered by SMSFs. Users have direct control over their investment strategy and retirement savings. Members within the fund are also considered trustees who are personally responsible for managing the fund. All decisions are made by the trustees with the best financial interests of the fund in mind.
Though there is greater control involved, there are a few potential hangups. For starters, trustees are required to ensure that the SMSF is compliant with all tax and superannuation laws. The fund must also be audited each year by an approved SMSF auditor.
Benefits
Control is the biggest benefit. Rather than taking a hands-off approach as would happen with more traditional funds, users are given all the power in their own investment decisions. Not only that, but trustees are also able to manage the retirement savings within that fund as well.
There are greater investment options as well. Trustees have access to a wider range of assets, including property, shares, and other investment types. There are also tax advantages to be aware of, especially since SMSFs offer favorable tax rates on capital gains and other earnings.
Can an SMSF Invest in Crypto?
Legally speaking, SMSFs are able to invest in cryptocurrencies in Australia. Per the Australian Taxation Office (ATO), a self-managed super fund is permitted to hold digital assets – things like Ethereum, Bitcoin, and other crypto tokens – so long as the rules are adhered to.
All SMSFs are required to comply with the sole purpose test. Basically, any investment, crypto included, has to be made for the sole purpose of providing retirement benefits to all holders of the SMSF. Crypto can be implemented as part of a more diverse investment strategy; it can’t be something that is merely dabbled in for fun.
Compliance Rules for SMSFs in Australia
There are certain compliance regulations and requirements that must be followed when it comes to crypto and SMSFs in Australia. We will break down each section, but crypto in an SMSF must be owned by the fund, stored securely, be properly recorded, and auditable.
Owned by the Fund. You aren’t able to use your own personal exchange account here. Any crypto in question must be owned by the fund itself and be registered under the fund’s name.
Store Securely. Crypto in an SMSF fund must be stored securely. The ATO recommends funds using cold storage or trusted custodial services to store crypto.
Properly Record. Maintain detailed transaction records, including things like wallet addresses and market valuations.
Auditable. If your SMSF holds crypto, it must be part of an annual audit. Keep detailed records; not having the requisite receipts could lead to a lot more hassle than anyone wants to deal with.
Why to Hold Crypto in Your SMSF
SMSFs are gaining steam in Australia all the time. According to the Australian Taxation Office (ATO), SMSFs accounted for more than $1.6 billion invested in cryptocurrencies in Australia alone. Compared to the $199 million invested in 2019, the growth is massive (639% growth in just six years).
The rise in crypto-driven SMSFs is largely driven by those with balances of less than $200,000. It shows that, if anything, digital assets aren’t just part of portfolios within the high-net-worth realm. That is partially because of the various benefits SMSFs offer:
Diversification. For those seeking diversification, cryptocurrency is a tremendous option, especially for those who aren’t so keen on things like property and stocks.
Tax-efficiency. Instead of holding cryptocurrency in your personal account, it pays to move it into your SMSF. That’s because you get access to lower tax on gains compared to personal account holdings.
Control. When you have an SMSF, you control all of the investments. That means being able to get involved in emerging assets classes like cryptocurrency whereas more traditional investment funds may stay away from something that carries as much natural volatility.
Growth potential. Digital assets like Bitcoin and Ethereum are notoriously volatile. That said, they have shown tremendous growth potential over the long term, making them enticing to investors who are more accepting of risk.
The Challenges of Adding Crypto to Your SMSF
While there are a number of benefits to adding crypto to your SMSF, it isn’t all sunshine and roses. It helps to know of the various challenges and hurdles to overcome when it comes to branching out into crypto for your fund.
Security
A major risk when it comes to investing in crypto SMSFs is security. Though the underlying blockchain technology is quite safe, wallets are hacked and private keys are lost all the time. If that happens, the crypto assets within your wallet may be lost for good. Compared to traditional bank accounts, there is no assurance or guarantee on your digital assets. Securing them in cold storage and restricting wallet access to authoritised trustees is crucial.
Volatility
Without a doubt, one of the biggest risks of investing in crypto is its volatility. Even Bitcoin and Ethereum have had wild price swings, sometimes even in the span of a few hours. Managing long-term retirement investments can become tougher and a crash in value could drastically impact your retirement savings.
Lack of Advice
Managing your own fund is great if you have a strong knowledge of digital assets and how to invest them. That said, you don’t have access to licensed financial planners within your SMSF. Having that kind of knowledge and expertise is invaluable when it comes to your investments.
Exciting Potential
The simple fact of the matter is that there is tremendous potential when it comes to adding cryptocurrency to your SMSF. Being able to control your own path and to partake in a rapidly growing marketplace is exciting and offers big potential. Know the pitfalls going in and make sure that your portfolio is compliant, and you can invest on your own terms.
