One of the benefits of having your own self-managed super fund (SMSF) is the ability to set and manage your own investment strategy. This means you can have greater choice and control over your investments than if you had any other form of superannuation fund, such as an industry or retail fund.
Some SMSFs invest in cryptocurrency as part of their investment strategy. Read more to find out what you should consider before investing in cryptocurrency.
What is cryptocurrency?
Cryptocurrency is the term given to digital currencies with no legal or intrinsic value in nearly all countries worldwide, including Australia. Cryptocurrencies are traded in an online market, where their worth is determined by how much people are willing to pay for them. They have no physical form like traditional currencies have with notes and coins. Instead, investors buy and sell digital cryptocurrency tokens.
Just like any currency, the price of a cryptocurrency fluctuates. Examples of cryptocurrencies include Bitcoin, Ethereum, Cardano, Dogecoin and Binance Coin. Cryptocurrency transactions are underpinned by blockchain technology. When you buy cryptocurrency, a digital wallet stores your digital tokens.
Important SMSF considerations before investing in cryptocurrency
There are several essential trustee considerations before you choose to include cryptocurrencies as an asset within your SMSF investment portfolio.
Review your SMSF trust deed
Firstly, your SMSF trust deed must allow for this type of investment. As cryptocurrency is a relatively new investment option, your trust deed may have been established before its introduction to the market. The investment provisions of your trust deed may need to be amended accordingly before you can invest in cryptocurrency.
Understand if it fits your SMSF investment strategy
It’s important to be aware that, in its short history, cryptocurrency has been shown to be a highly volatile investment. It should therefore be approached with caution, especially if you have SMSF members in or near retirement age. Regardless of your members’ age, any cryptocurrency investment should be part of a diversified investment strategy that includes a variety of asset classes.
If your investment strategy is positioned to accommodate cryptocurrency, or if you decide you want to invest in cryptocurrency and your trust deed allows it, you must set up a cryptocurrency trading or exchange account in the name of your SMSF. You will be able to set up this account via any of the cryptocurrency exchange platforms that are available online.
Tax implications
Tax losses or gains on your SMSF cryptocurrency transactions will be subject to capital gains tax provisions. If you buy and sell cryptocurrency within 12 months and make a capital gain, all gains will be taxable at the standard concessional superannuation rate of 15%. If you hold on to cryptocurrency for at least 12 months before selling it, you will get a 33% CGT discount (i.e. the gain will be taxed at 10%). Any transaction losses can be offset against current or future capital gains.
Record keeping
You should keep all records of your SMSF transactions for at least five years. There are very strict rules when it comes to running an SMSF. Cryptocurrency transactions are now included in the ATO’s data matching program, so it’s crucial that you record all of your SMSF transactions accurately and that you have the appropriate records to substantiate your claims if the ATO ever audits you.
At the very least, your SMSF auditor will need this information when reviewing your SMSF’s activities each year to ensure its compliance with superannuation legislation.
Top tip: remember to review your SMSF’s investment strategy regularly, not just at its annual review. Market fluctuations, life events, adding more fund members or when you experience changes to your financial situation should all call for a review of your investment strategy.
What to consider before investing towards your retirement benefits
Some of the primary considerations for every SMSF trustee before investing in cryptocurrency should be:
- What are the fund’s cash flow requirements?
- Is there a sufficient super balance to achieve a diversified portfolio? Inadequate diversification has recently been a significant concern for the ATO regarding SMSFs investments.
- How does cryptocurrency correlate with the fund’s assets?
SMSF property investment vs cryptocurrency investment
Naturally, most SMSF trustees will access personal financial advice before setting their SMSF investment strategy. After all, an SMSF’s investment strategy is what guides the fund’s investments and builds the retirement savings of its members.
Like most investment options available to SMSFs, cryptocurrency investment may offer both capital growth and income opportunities. Depending on your time frame to retirement, you might prefer to look at a more historically-proven growth asset, such as property investment, for your self-managed superannuation fund.
However, it’s important to know your compliance obligations with superannuation and tax legislation before making investment decisions. A direct property purchase within an SMSF, such as an investment property, residential property or commercial property, should always be done with the guidance of a specialist.
It makes sense to go to the experts if you’re looking to borrow money to buy property within your SMSF to establish a limited recourse borrowing arrangement. SMSF Loan Experts can help make investing in property simple.
Contact us today to discuss your options for making a bricks-and-mortar investment towards your retirement planning goals.
