Speaking to SMSF Adviser, Hayes Knight director of SMSF services Ray Itaoui said that, as part of the 2019 tax return, SMSFs are required to record if they have any cyrptocurrency investments in their fund.
“In the past, cryptocurrency was recorded under the ‘other asset’ section of the tax return, so it was hidden and it wasn’t that clear that the fund was invested in cryptocurrency. Now the ATO wants accountants to specifically identify cryptocurrency on the tax return so it’s going to know what funds have invested in these assets,” Mr Itaoui explained.
The fact that super funds are now identifying on their tax return whether they are investing in these assets, he said, could be an indication that the ATO is aware that it is a challenging asset to hold in a super fund and that it is concerned that some funds may be getting it wrong.
“It may become a focus area for the ATO once they have that information on what funds are investing in it. I suspect they want to ensure that trustees are doing the right thing and making sure that there is a clear separation of ownership and that trustees are diligent in their record keeping,” he said.
“Imagine if you ended up with a situation where a trustee or member passes away and no one can access their digital wallet, and there might be $500,000 of cryptocurrency or bitcoin and it can’t be accessed because they haven’t kept on top of their record-keeping requirements or followed the right processes. The ATO wants to avoid situations like that from happening, so they are being proactive in identifying funds that are high-risk.”
Mr Itaoui clarified that SMSFs are able to invest in cryptocurrency, but said it can be challenging to make sure that it is structured correctly because it is quite complex.
“I suspect that a lot of practitioners and a lot of auditors don’t necessarily understand exactly what they have to do to be able to make sure that they are investing in these types of assets correctly, so the ATO is providing more information for accountants, and auditors might [be] a starting point as well,” he said.
“It’s going to be interesting because bitcoin has been heading back up to the $US11,000 mark again, so it’s starting to gear up at a point where returns and interest rates are low which may see it become relevant again.”
It can be incredibly valuable for people to note that when investing capital from a SMSF into cryptocurrency there can be substantial gains found by using an over the counter brokerage specialised in large trade size orders (over $50,000). Using exchanges for large trades can be costly due to the thin order-book liquidity available and high fees.
The account with the exchange needs to be registered in the name of the SMSF entity.. you cant just send funds to a private account (exchange), and then to a hardware wallet. Coinjar.com allows for a SMSF account for this purpose.
That’s what I was referring to below Tony (i.e. register as an SMSF at the exchange, not an individual). I apologise if it wasn’t clear.
It doesn’t have to be difficult. Steps below:
– Purchase a hardware wallet (e.g. Ledger Nano S or Trezor) for around $100 – $150
– Register as an SMSF (not an individual) at a cryptocurrency exchange which allows registration as an SMSF (I believe Cointree and Coinspot both allow this; there are likely others, but these have been established for quite some time).
– Transfer cash from your SMSF working cash account to said exchange.
– [b]Prior to purchasing any cryptocurrencies/tokens[/b] – Ensure any cryptocurrencies you will be purchasing can be stored on your hardware wallet (as these wallets don’t support all cryptocurrencies/tokens, but the main ones such as Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Dash, Monero etc are all supported).
– Purchase cryptocurrencies on exchange.
– Transfer cryptocurrency to your hardware wallet ASAP (to minimise risk of loss via hacking / exchange shutdown – see note below).
– Download reports from exchange (this shows how much bought, costs etc.) to save with SMSF meeting minutes / keep on SMSF file.
– Store the password and seed codes for your wallet in separate secure locations, accessible to a selected, trusted third party; the details of whom are recorded and known.
Control of private keys is the most crucial thing here. Crypto relies on public and private keys. Think of the public key as a PO Box and the private key as the actual key to the PO Box lock. Anyone can know your public key (i.e. your PO Box address in this analogy) and put items into your PO Box, but only you – the private key holder – can access the contents of the PO Box.
The reason cryptocurrency exchanges have been successfully hacked before is because [b]the exchange holds both the public and private keys.[/b] Once the hackers gain access to the exchange, they can then access and transfer crypto out of the exchange. When you hold cryptocurrency on a hardware wallet (such as the Ledger or Trezor as mentioned above) these hold the private keys [b]on the wallet itself in a secure chip, offline.[/b] This cannot be hacked as it is not held on the internet in an open location.
It is recommended to store the cryptocurrency wallet in one secure location and the seed codes / wallet PIN in a separate secure location. (Seed codes are generally 12 or 24 words generated by the wallet upon initial startup, which allow restoration of the contents of the wallet to another wallet in the event that the original wallet is lost/damaged/stolen).