Experts highlight complexities with crypto and SMSFs
With SMSF investors increasingly incorporating cryptocurrency into their funds, it's important to take note of the complexities involved in the merging of the two worlds.
Based on the latest ATO statistics, SMSFs held $227 million AUD in cryptocurrency assets at 31 December 2021, with that amount continuing to grow.
Speaking ahead of the SMSF webcast on cryptocurrencies and SMSFs, Shane Brunette, CEO and co-founder of CryptoTaxCalculator says that while the popularity of cryptocurrencies involved in SMSFs is increasing, there isn’t enough awareness about the nuances that are required to compliantly incorporate one into the other.
“SMSF professionals will need to carefully manage the combination of crypto and SMSFs. This is to ensure that any and all crypto assets are valued correctly and that there is enough evidence to satisfy the sole purpose test”, Brunette said. “Providing evidence of asset ownership and activity for the purposes of satisfying the sole purpose test can be tricky”, he states.
According to the ATO’s current guidelines, SMSFs can invest in crypto if it is allowed under the fund’s deed and in accordance with its investment strategy. They have to demonstrate clear ownership of the crypto.
“Legal documentation is critical, especially for non-exchange wallets which have no ownership details recorded,” says Harrison Dell, director of Cadena Legal.
Separate from the need to comply with the ATO’s current guidelines, SMSF trustees also need to minimise risk to clients’ portfolios.
“With crypto, volatility is really important when assessing risk levels. If the crypto that your clients wants to invest in has historically seen large fluctuations, it could heighten the level of risk involved. This is where the discussion towards a diversified portfolio comes into play”, says Brunette.
“We expect this space to get much bigger and continue to change, as listed investments now track crypto indexes like Monochrome or DeFi alternatives like $DPI (DeFi Pulse Token),” said Dell.
As the space grows, the importance of appropriate legal documentation surrounding proof of assets, ownership of wallets, and tax records also increases. The amount of record-keeping required to stay compliant can become very burdensome and may increase as tax reforms are expected in coming years. Fortunately, crypto tax software exists to reduce this manual workload.
Complexities surrounding crypto, potential portfolio risks, record-keeping requirements, and practical methods to achieve compliance will be discussed in the upcoming webcast hosted by SMSF Adviser.
The webcast takes place on Tuesday the 23rd of August with Shane Brunette and Harrison Dell.
