Speaking in a recent SMSF Adviser show podcast, Crypto Tax Calculator product manager Matt Crofts said the number of SMSFs with some exposure to cryptocurrency has been roughly doubling each year since the ATO began tracking crypto assets held in SMSFs.
“The latest ATO numbers from June indicated that around 4 per cent of SMSFs have some exposure to cryptocurrency and that lines up with what the software providers have been tracking. The actual dollar value would have decreased though,” said Mr Crofts.
Mr Crofts said that as interest in crypto assets increases there have also been more exploration with different ways of investing with cryptocurrency.
“Staking for example is becoming more common and is becoming less complex to do,” he said.
“In the past you used to have to set up a whole IT infrastructure to be a bit of a boffin to actually do staking and to be able to set up a computer to do that. Staking has now become a lot more streamlined.”
Staking can effectively just mean an income stream that you’re validating on the blockchain, he said.
“You’re contributing to the security of the blockchain, that’s where the word staking originally comes from but it’s been extended into finance areas,” he said.
“You can go onto an exchange now and they’ll call it staking but it’s sort of like an interest bearing account. Luna was a terrible example of that. Terra Luna was paying an income stream and it wasn’t called staking, it was called savings but you’ve got to watch out for those.”
The other important consideration with staking, he said, is that it’s generally considered income by the ATO.
“The challenge with that is that if you’ve laid down some Ethereum and it was paying a staking reward of let’s say $100 a day, then that’s the value at the time you staked it and that’s what you have to record the value as when it hits your wallet,” he explained.
“So that means it’s derived income at the point where you receive it into your wallet and if that’s now dropped 90 per cent and you haven’t sold any of it then you’re going to have a bit of a cash flow issue.”
Mr Crofts said if it’s something like Ethereum or one of the smaller coins, it may have significantly dropped in value and you’re left holding that.
“If you want to pay your tax bill then you might have to realise that asset at a significant loss,” he said.
“It’s a crypto asset so you can record a loss but you’ll still have to pay tax on the income that you’ve derived from that staking. So it can become a major cash flow issue and probably something you’d want to consider in your investment strategy.”
The latest crypto scam-failures should be a wake up call to the Australian Government. The crypto sector in Australia must be regulated. The sector is clearly unable or unwilling to self regulate.
The proliferation of unaudited crypto exchanges that report to no one is astounding. These exchanges are not themselves audited or subject to regulatory governance. Yet SMSF investors continue to pour their retirement funds into them.
The same SMSF trustees then expect auditors to sign off an an exchange’s crypto holding report at 30 June, when it’s nothing but a piece of paper! Have we learnt nothing from the last 20 years of Ponzi schemes?
Crypto exchanges don’t give you “wallets” or codes, they take your hard earned money and no one knows where it really goes.
SMSF trustees will tell auditors “but I will accept the risk”! It’s not up to you dear. The annual SMSF audit is essentially an ATO audit that has been privatised. The tax savings you make in super would otherwise have gone to government revenue as income tax, so at least -1/3 of your super belongs to the rest of us! And we don’t want you squandering that then fronting up for the aged pension in retirement that we have to fund!
Unless these Crypto exchanges voluntarily have themselves audited AND provide a copy of that report to the SMSF auditor, then I dare any SMSF auditor to sign off without a financial qualification.
These same SMSF trustees who say they accept the risk will be the very ones who turn and sue the auditor for signing off on their crypto, and we know those lawsuits can get up.
Canda has regulated crypto exchanges, Australia needs to hurry up. What is it they say about “a fool and his money?”
The biggest challenge for centralised exchange operators is their wallet management. I frequently compare exchanges to bullion vaults. Both custody bearer assets for their customers, both have an unallocated pool of assets, both also allow you to withdraw and self-custody what you have purchased. The biggest difference, however, is that bullion vaults also offer the ability to designate a certain vault and certain bullion assets to a particular customer. This would arguably be a simple product for centralised exchanges to offer to customers (infinitely cheaper as well) and, in the case of SMSFs, would allow for SMSF auditors to more comfortably sign off on their reports without qualification.
Until this happens, SMSF trustees should either make peace with their audit reports being qualified or, if competent enough, self-custody the assets. Not your keys, not your crypto.
Thanks Matt. The information helps the many of us who are crypto-novices gain a better understanding of the transaction and the lingo.