Super Funds: Cryptocurrency Investment Strategies And Opportunities

Cryptocurrencies have become increasingly popular in recent years, and many people are now looking to include them in their retirement portfolios. In Australia, the only way to do this is through a Self-Managed Super Fund (SMSF). SMSFs are managed by trustees who run the fund for their own benefit and have the freedom to choose how their super is invested. While cryptocurrencies are a high-risk investment due to their volatility, they can potentially lead to huge returns. The Australian Taxation Office (ATO) has recognised cryptocurrencies as capital gain assets, which are taxable at a concessional rate of 15%. This has opened up opportunities for SMSF investors to include cryptocurrencies in their portfolios, and several platforms now offer dedicated accounts for super funds. However, it's important to carefully research and seek specialist advice before investing in cryptocurrencies due to their risky nature.

The benefits of investing in cryptocurrency through a super fund

Cryptocurrency has become an increasingly popular investment option, and super funds are starting to take notice. While there are risks associated with investing in cryptocurrency, there are also several benefits that make it an attractive option for super funds. Here are some of the advantages of investing in cryptocurrency through a super fund:

Diversification: Cryptocurrency can provide super funds with exposure to a new asset class, helping to diversify their portfolios. By including cryptocurrency in their investment strategy, super funds can potentially reduce their reliance on more traditional assets and spread their risk.

Potential for High Returns: Cryptocurrencies are known for their high volatility, which can lead to significant price swings. While this volatility cuts both ways, it also presents an opportunity for super funds to generate substantial returns. The potential for high returns can be particularly attractive for long-term investors, such as super funds.

Tax Advantages: In Australia, the Australian Taxation Office (ATO) classifies cryptocurrencies as capital gains assets, which are taxed at a lower rate than income. This means that super funds investing in cryptocurrency may benefit from a more favourable tax treatment compared to other types of investments. The current concessional tax rate for Self-Managed Super Funds (SMSFs) is 15%, with long-term capital gains taxed at an effective rate of 10%.

Autonomy and Flexibility: SMSFs offer individuals greater autonomy over their investment choices compared to retail or industry super funds. By investing in cryptocurrency through an SMSF, individuals can take advantage of this flexibility to include a diverse range of assets, such as cryptocurrency, gold, private equity, and collectables. This allows investors to tailor their investment strategy to their specific goals and risk tolerance.

Alternative to Traditional Financial Institutions: Cryptocurrency and blockchain technology offer an alternative to the traditional financial system, which relies on third-party intermediaries to process transactions. With cryptocurrency, transactions can take place directly between users without the need for intermediaries, giving investors more control and reducing their reliance on traditional financial institutions.

While there are benefits to investing in cryptocurrency through a super fund, it is important to carefully consider the risks and seek specialist advice from an independent, licensed investment professional. Cryptocurrency is a relatively new and highly volatile asset class, and regulations in this space can vary.

How to set up a super fund that invests in cryptocurrency

Setting up a super fund that invests in cryptocurrency can be done through a Self-Managed Super Fund (SMSF). SMSFs are the only way for Australians to include cryptocurrencies in their retirement portfolios.

Step 1: Understand the Risks and Regulations

Before setting up an SMSF, it is important to understand the risks and regulations involved. Cryptocurrencies are highly volatile and speculative, and the market value can fluctuate over short periods. The investment strategy is based on the expectation that the cryptocurrency will appreciate in value, but there is no defined return. As such, some investors argue that crypto investments are inappropriate for SMSFs.

Additionally, the Australian Tax Office (ATO) does not recognize cryptocurrencies as 'currency' or 'foreign currency' as they are not legal tender. Instead, they are considered assets for capital gains tax purposes, and SMSF trustees must ensure compliance with relevant super and tax laws.

Step 2: Consult a Specialist

Due to the complex and risky nature of cryptocurrency investments, it is highly recommended to seek specialist advice from an independent, licensed investment professional. They can guide you through the regulations, risks, and potential benefits of including cryptocurrency in your SMSF.

Step 3: Choose a Platform

Several platforms offer dedicated accounts for your super fund's cryptocurrency investments. Examples include Binance, Swyftx, BTC Markets, and NGS Crypto. Each platform has its own features, fees, and supported cryptocurrencies, so it is important to research and choose one that aligns with your investment strategy.

Step 4: Set up an SMSF Account

Once you have chosen a platform, you will need to set up an SMSF account. This typically involves providing information such as the name of your SMSF, registration date, registered address, SMSF ABN, and operating address. You will also need to upload relevant documents, such as your trust agreement/deed and proof of business operating address.

Step 5: Fund the Account

To fund your SMSF account, you will need to deposit funds from a bank account associated with your SMSF name. Ensure that you do not deposit SMSF funds into your personal account, as this can have legal and tax implications.

Step 6: Start Investing

After your SMSF account is set up and funded, you can start investing in cryptocurrencies. Remember to keep detailed records of your transactions and ensure that your investments are identified as belonging solely to the SMSF, separate from any personal assets.

Ongoing Compliance and Audits

It is important to stay compliant with the ATO's regulations and keep up with any changes in the law. SMSF trustees are ultimately responsible for ensuring compliance, even if they receive professional help. Additionally, seek guidance from your chosen platform or a specialist to navigate the audit process for your crypto investments.

The risks of investing in cryptocurrency through a super fund

Investing in cryptocurrency through a super fund, such as a Self-Managed Super Fund (SMSF), is a risky venture. Cryptocurrencies are a highly volatile and speculative asset class, with huge swings in price. The decentralised and unregulated nature of cryptocurrencies means that investors could be exposed to significant losses with little recourse.

One of the primary risks of investing in cryptocurrency through a super fund is the potential for low or negative returns. The value of cryptocurrencies is largely driven by popular opinion, media hype, and investor sentiment, which can lead to sudden spikes and drops in value. As such, investing in cryptocurrency is highly speculative, and the potential for major losses is ever-present.

Another risk to consider is the technical complexity of cryptocurrencies. Crypto-assets can be difficult to understand, with no standard product disclosure statement or prospectus outlining how they operate. This complexity increases the risk of user error, such as sending transactions to incorrect addresses or incurring excessive transaction fees.

Security is also a significant concern. Cryptocurrency wallets can be hacked, and the anonymous and decentralised nature of blockchain technology makes it difficult to recover stolen assets. While some protections, such as hardware wallets or cold storage, can be implemented, the risk of theft or fraud remains.

Additionally, the lack of regulation in the crypto space means that investors may not have the same protections as they would with traditional financial products. Crypto exchanges may not be regulated, and investors could lose all their money if a platform fails or is compromised.

It is also important to note that super funds have specific legislative requirements, such as the sole purpose test, which must be adhered to when investing in cryptocurrency. Trustees are responsible for ensuring compliance and could face legal and financial consequences if they breach these requirements.

Overall, investing in cryptocurrency through a super fund carries significant risks, including the potential for substantial financial losses, technical complexities, security concerns, and regulatory uncertainties. Seeking specialist advice from an independent and licensed investment professional is highly recommended before making any investment decisions involving cryptocurrencies.

How to buy cryptocurrency using a super fund

Cryptocurrency has been the best-performing asset class of the past decade, and it is now maturing. Self-managed super funds (SMSFs) are the only way for Australians to include cryptocurrencies in their retirement portfolios.

SMSFs are managed by trustees who run the fund for their benefit. Each SMSF must adhere to super and tax laws laid out by the Australian Taxation Office (ATO). The ATO does not recognise cryptocurrencies as 'currency' or 'foreign currency' because it is not recognised as legal tender by any country. It is considered an asset for capital gain, so for tax reasons, the SMSF trust deed and investment strategy would need to allow for 'crypto-assets'.

• Determine whether you are setting up an individual or corporate SMSF.
• Appoint the trustees.
• Set up the trust and trust deed, allowing cryptocurrency as an investment. The trust deed must explicitly allow for investment in cryptocurrencies.
• Ensure your fund complies with the SISA and SISR regulator requirements.
• Register your fund and obtain an ABN.
• Set up a bank account for your SMSF.
• Roll over your funds to the SMSF.
• Set up a dedicated SMSF trading account on a cryptocurrency exchange such as Kraken or CoinSpot. You will need to provide the following information:

• SMSF Trust Information, including the registered trust name and address.
• A copy of the trust deed.
• Trust beneficiary details.

Verify your SMSF trading account. You will need to provide the following information:

• General business information, including the name of your SMSF, registration date, registered address, SMSF ABN, and operating address.
• Upload your trust agreement/deed.
• Proof of Business Operating Address – a document showing the physical address of the trust.

Start trading cryptocurrency with your SMSF.

It is important to note that investing in cryptocurrency is risky, and you should not invest more money than you can afford to lose. The price of cryptocurrencies is extremely volatile, and you could lose all your money if the cryptocurrency fails. It is recommended that you get specialist advice from an independent, licensed investment professional before making this type of investment.

The tax implications of investing in cryptocurrency through a super fund

Investing in cryptocurrency through a super fund, also known as a Self-Managed Super Fund (SMSF), can have several tax implications that individuals should be aware of. While SMSFs are not prohibited from investing in cryptocurrencies, it is important to understand the associated tax consequences.

Firstly, the Australian Taxation Office (ATO) considers cryptocurrencies as capital gains tax (CGT) assets rather than a form of money. This means that any gains or losses from cryptocurrency investments made through an SMSF are generally subject to CGT. The tax rate for CGT on crypto assets held for less than a year is typically higher than the long-term capital gains tax rate, which applies to assets held for more than a year. It is important to keep accurate records of all cryptocurrency transactions to ensure compliance with tax regulations.

Secondly, the ATO requires SMSFs to keep their crypto assets separate from personal or business investments. This includes maintaining a separate crypto wallet specifically for the SMSF, distinct from any personal crypto wallets held by the trustees or members. Any mixing of personal and SMSF crypto assets would breach the sole purpose test, which states that an SMSF must be maintained solely for providing retirement or death benefits to its members.

Thirdly, the valuation of crypto assets held by an SMSF must be in accordance with ATO guidelines. The value of these assets is constantly changing, and the ATO will accept the closing value published on a reputable crypto exchange's website as of 30 June of the relevant financial year for calculating member balances.

Finally, it is important to note that the tax treatment of cryptocurrencies is still evolving, and there may be additional reporting requirements or regulations in the future. Therefore, it is highly recommended to consult with a tax professional or financial advisor with expertise in cryptocurrency investments and retirement accounts to ensure compliance with the latest tax laws and to maximise potential tax benefits.

Frequently asked questions