In recent months, it’s been reported that an increasing number of self-managed super fund (SMSF) trustees are incorporating cryptocurrencies into their SMSF investment strategies.
This is in spite of the notorious volatility in the price of ‘cryptos’ such as bitcoin, with economists around the world warning buyers of the potential risks of going down this investment path.
Recently, AMP Capital’s Head of Investment Strategy and Chief Economist Shane Oliver said there were “serious grounds for caution” around bitcoin.
SMSF Association’s Head of Policy Jordan George told Canstar there were certain types of investment profiles that may not be suited to investing in cryptos through a SMSF.
“Volatility of any investment is an important factor that should be considered when deciding how to invest your superannuation,” he said.
“SMSF members that are in retirement phase and rely on consistent returns to pay pensions may not want to invest in volatile investments.
“However, younger investors may have a higher tolerance for volatility as they are not as close to accessing their superannuation.”
Mr George said SMSF trustees should ensure any investments aligned with their SMSF’s investment strategy, including their “goals, risk tolerances and their needs and circumstances”.
“We also encourage SMSF trustees to take a long-term view of how they invest their superannuation savings, as superannuation is a long-term savings vehicle that funds retirement income,” he said.
“This view can help trustees avoid the pitfalls of trying to ‘time the market’ on different investments.”
Canstar Q&A with Drew Pflaum – Bitcoin Cash Consultant & Certified Accountant
To learn more about the ins and outs of investing in bitcoin and other cryptocurrencies through a SMSF, we spoke to a manager with Munro’s Accountants and Business Advisors, Drew Pflaum.
Q. How do you invest in cryptocurrencies through a SMSF?
Beforehand, they (SMSF trustees) need to make sure it is permitted, which means confirming the trust deed authorises investments in cryptocurrencies. Most deeds wouldn’t explicitly mention cryptocurrencies, but the more modern deeds allow investing in anything an individual can, which includes cryptocurrencies. Trust deeds vary greatly, so each trustee needs to check their deed.
The SMSF needs to permit cryptocurrency investing in its investment strategy. In most cases, the investment strategy will probably need to be updated to authorise cryptocurrency investing.
To acquire the cryptocurrency, the SMSF will probably need to open an account at an exchange. Some Australian crypto exchanges now allow you to open an account in the name of a SMSF. The usual process is then for the SMSF to send AUD from its bank account to the exchange and then make the buy order. Some exchanges only have a limited number of cryptocurrency available (e.g. bitcoin, ether, bitcoin cash). If the SMSF wants to purchase a lesser-known crypto, then it’ll probably need to acquire one of the cryptos available on the exchange and then use an overseas-based exchange. Overseas exchanges tend to offer more crypto.
Some people are acquiring hundreds of thousands of dollars worth of crypto in their SMSF. Instead of using an exchange, there are businesses offering Over The Counter (OTC) services to acquire and store crypto. This is typically only for the major crypto. These OTC services charge something like a 3-5% fee to acquire large sums of crypto, and then offer a service to securely store the crypto in safety deposit boxes. They can also arrange all the necessary documentation to substantiate purchases and the end of year value and holdings for audit purposes.
An SMSF cannot purchase cryptocurrency from its members.
Once the crypto is acquired, the trustee is responsible for securely storing the crypto. There is no one size fits all solution. There have been many stories of exchange hacks and scams, so generally, it isn’t a good idea to keep crypto on an exchange. The two most common options are to use a hardware wallet or paper wallet. To use a hardware wallet, the SMSF would need to purchase a hardware wallet and store the crypto on it. Importantly, it must keep this crypto separate from personal holdings. The other option is to use a paper wallet and store this in a safe place.
The trustee should also consider whether to insure the crypto. I believe the Over The Counter businesses can help arrange this.
At year-end, the crypto must be valued at its market selling value in order to prepare the financial statements. The trustee needs to obtain evidence of its holdings and the value. This can include a screenshot of the wallet interface displaying the holdings and the blockchain address so the auditor can verify the holdings on a blockchain explorer. The value of the crypto can be calculated by referring to the market price from a reputable exchange.
The more trades the SMSF does, the more onerous the record keeping. Particularly if the SMSF does crypto-to-crypto trading because the AUD value at that time needs to be recorded.
There is extreme price volatility in crypto, and so the trustee of a SMSF should probably be reviewing their crypto investment decisions to determine whether they are prudent. Ultimately these financial decisions are the responsibility of the trustee.
Q. What are the advantages and disadvantages of going through an SMSF compared to investing in bitcoin directly?
There can be tax advantages for investing in bitcoin/cryptocurrency using a SMSF compared to in one’s personal capacity – the same as with other investments. Super is concessionally taxed, which is quite often at a lower tax rate than individual tax.
Some people would consider a disadvantage being that if one makes profits on cryptocurrency in a SMSF, those profits cannot be used for personal purposes. They must remain in the SMSF for the sole purpose of providing for retirement benefits at the appropriate time.
Q. Are you receiving a lot of enquiries about investing in Bitcoin through a SMSF?
Yes, there is interest. The informal rule of thumb is a SMSF balance should be at least $200,000 before it is set up. We get enquiries from those with a balance higher than this. We also get enquiries from those with a super balance less than this. Some people want to put a small part of their super into crypto, whereas others want to go all-in. Sometimes its bitcoin only, sometimes a combination of bitcoin and altcoins, and sometimes only altcoins.
Q. What are some of the key things individuals need to be aware of if they want to invest in Bitcoin through a SMSF?
- Starting and operating a SMSF means taking on a lot of responsibility. Superannuation is highly regulated and must be taken very seriously. Contravening the rules can have severe consequences.
- The cost to set up a SMSF and ongoing costs.
- Do they understand cryptocurrencies enough?
No one knows what is going to happen in cryptocurrencies. They could go up, down, go to the moon, collapse to nil or stay the same.