Investing in Cryptocurrency by my SMSF

Investing in Cryptocurrency by my SMSF is becoming an attractive option for many. With the growing interest in cryptocurrency as an asset class, many SMSF (Self-Managed Superannuation Fund) trustees are exploring the potential of digital currencies like Bitcoin and Ethereum to diversify their portfolios. While Crypto can be an exciting investment, managing it within an SMSF has unique challenges and compliance requirements. Cryptocurrency investments in an SMSF environment raise issues such as trust deed considerations, compliance, storage methods like cold wallets, and how to sell crypto assets effectively.

Whether you’re just starting or looking to refine your approach, these insights will help you make informed decisions.

Understanding the Sole Purpose Test

The primary purpose of an SMSF is to provide retirement benefits for its members. All investments, including cryptocurrency, must comply with the sole purpose test. This means that crypto investments must be made solely to benefit the fund’s members in retirement.

Therefore, avoid personal use or benefit. For example, using Crypto held by the SMSF for individual transactions is a breach of this test. Compliance with this rule is fundamental to maintaining the fund’s integrity and avoiding penalties.

Does Your Trust Deed Permit Crypto Investments and do you have an investment strategy when considering investing in Cryptocurrency by my SMSF?

Your SMSF is governed by its Trust Deed, which outlines what the fund can and cannot do. Before investing in cryptocurrency by my SMSF , review the trust deed to ensure it explicitly permits such investments. Older Deeds will not account for digital assets. Therefore updating your SMSF Deed may be necessary , contact us if you need help . At this stage, Review the Trust Deed. and in doing so look at clauses that explicitly allow cryptocurrency or permit broad investment in your Fund. If required, your deed may need to be updated if Crypto is not expressly covered.

Every SMSF must have a documented investment strategy that outlines the fund’s objectives and how different asset classes, including cryptocurrency, contribute to achieving those goals.

When adding Crypto to your portfolio, ensure the strategy covers the allocation of Crypto within the broader portfolio. Document and understand the risks associated with Crypto’s volatility and security. Also, how does the investment align with the sole purpose test?

Additionally, the strategy should be regularly reviewed to reflect any significant changes in the market or the fund’s objectives.

Choosing a Storage Method for SMSF Crypto

Private keys determine cryptocurrency ownership, and where you store these keys has significant implications for security, accessibility, and compliance. Here is a comparison of two popular storage options for SMSFs:

Cold Wallets

A cold wallet is an offline storage solution, such as a hardware device, offering the highest level of security against hacking. If using a cold storage wallet, please note that you will be more immune to online threats. It also gives the SMSF complete control over private keys and is suitable for long-term investments. The downside is that your cold wallet requires secure recovery phrases and key storage. We should also note that proof of ownership for SMSF purposes requires detailed documentation. When using a cold wallet, ensure it is exclusively used for the SMSF, with clear labelling and records to avoid mixing personal and SMSF assets.. Read the article at coinbase here on setting up a cold wallet

Exchange Accounts

An online exchange, like CoinSpot or Binance, can also hold crypto assets. They are easier to set up for the average SMSF Trustee and convenient for frequent trading. However, the custody of assets lies with the exchange, not the SMSF. The downside is that exchange accounts are not as safe, and there is a higher risk of hacking than cold wallets. To comply with SMSF rules, the Funds exchange account must be registered in the SMSF’s name, and all transactions must be well-documented.

Proving SMSF Ownership of Crypto

Ownership transparency is critical to SMSF compliance. Cold wallets and exchange accounts must identify that the assets belong to the SMSF.

Steps to ensure this include using dedicated wallets or accounts labelled for the SMSF. Ensure you have recorded the wallet addresses and linked them to the fund’s records.
Finally, make sure you are maintaining transaction logs with timestamps and values.

Auditors will require evidence, so meticulous documentation is essential.

Transferring Crypto from Personal to SMSF Ownership

Due to superannuation laws, transferring Crypto from a personal wallet to an SMSF can be complicated. SMSFs cannot acquire assets from related parties unless they fall under specific exemptions, and cryptocurrency does not typically qualify. You can sell and repurchase Crypto to move it into your SMSF. Sell the Crypto in your personal account, transfer the funds to the SMSF, and repurchase the Crypto in the SMSF’s name.

The exceptions to this rule allow SMSFs to acquire assets from related parties if they are:
1. Business Real Property: Property used solely in a business.
2. Listed Securities: Shares listed on an approved stock exchange.
3. In-House Assets (Within 5%): Subject to strict limits and conditions.

Be careful

Cryptocurrency does not fall into these categories, so your SMSF cannot directly acquire Crypto from you as a related party. In limited cases, an in-specie contribution may be undertaken to your SMSF. Crypto can be transferred as a non-cash contribution; however, please ensure that any contribution is made within contribution caps. Use a market valuation for the transfer with proper documentation. Always consult a professional to navigate these transactions and avoid potential compliance breaches, and we would also consult the fund auditor for approval.

SMSF and Crypto – document and meet compliance record keeping

Investing in cryptocurrency by my SMSF can be a rewarding strategy for diversification and growth, but it requires careful planning, strict compliance, and diligent record-keeping. From ensuring your trust deed permits crypto investments to securely managing assets in a cold wallet, each step must align with superannuation laws and the sole purpose test. At Gartly Advisory, we are here to help. Geoff has undertaken Crypto investing and understands the highs and lows of such an investment class.