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Key considerations for SMSF and crypto investments

Investing in cryptocurrency through an SMSF presents unique opportunities, but it also comes with critical responsibilities that require meticulous attention. For example, the intangible nature of cryptocurrencies accentuates the importance of maintaining precise records. This step is often overlooked, yet it’s a step that can result in a comprehensive audit.

So, what measures should SMSF trustees take to preempt potential issues down the road?

Understanding SMSF trustee & member responsibilities.

An SMSF's investment strategy covers the objectives and types of investments it can venture into. Before diving into the world of crypto assets, trustees and members should assess the risks. If needed, they should revise the fund's investment strategy to ensure compliance with the contemplated investment.

Prior to acquiring cryptocurrencies, trustees should review the investment provisions detailed in the SMSF's trust deed to ensure it’s an approved investment. If it’s not, they might like to amend the trust deed to include cryptocurrency investments.

Acquiring cryptocurrency.

To acquire cryptocurrency, an SMSF must establish a trading or exchange account with an external platform in the fund's name. A thorough due diligence assessment of the chosen exchange is essential to ensure proper account setup and that trustees comprehend the ensuing reports. Notable platforms for trading include Swyftx and CoinSpot.

Maintaining asset separation.

Clear separating assets is essential. Crypto investments must be meticulously managed independently from the personal or business matters of trustees and members. A digital wallet should exclusively house the SMSF's crypto assets. Popular and trusted options include Capital, eToro, Trezor Model One, and Ledger Nano X.

Cryptocurrency records required for auditing.

Auditors will necessitate a comprehensive set of records for cryptocurrency investments, including:
Transaction receipts with purchase, transfer, or disposal dates.
A record of each transaction date.
Transaction purposes and counterparty information (e.g., crypto asset addresses).
Exchange records.
Valuation of crypto assets in Australian dollars at each transaction's time.
Documentation of agent, accountant, and legal expenses.
Digital wallet records and keys.
Software costs related to tax management, such as digital wallets.

Other details you need to know.

Each crypto asset should be detailed separately, as they are distinct Capital Gains Tax (CGT) assets. Additionally, an annual trustee declaration is mandatory to verify ownership.

In financial reporting, digital assets must be categorised as "Digital Assets / Crypto / Crypto Currency / Other Asset." However, if the digital investment holds substantial significance, it warrants specific disclosure.

Finally, for tax purposes, it's essential to recognise that crypto assets are not considered currency, but CGT assets. Therefore, any regular income derived from crypto — such as token rewards — must be declared as “other income” in the SMSF tax return.

The ATO's vigilance

The Australian Taxation Office (ATO) has been monitoring cryptocurrency since 2019 through a data-matching program focusing on crypto transactions. This initiative enables the ATO to access data from Designated Service Providers (DSPs) to identify crypto buyers and sellers and quantify their transactions. It then cross-references this data with its own records to detect individuals failing to meet their registration, reporting, submission, and payment obligations.

Here’s what your SMSF auditor must be able to review:

Compliance with the SMSF's investment strategy for cryptocurrency investments.
Adherence to SIS act and trust deed provisions governing the investment.
Proper registration of the digital wallet in the fund's name.
Reconciliation of end-of-year balance with holding statements.
Submission of a detailed transaction listing for review.
Accuracy of cryptocurrency valuations converted to Australian dollars.
Correct asset classification as Digital Assets / Crypto / Crypto Currency / Other Asset.
Receipt of an Annual Trustee Declaration.

Confused? You’re not alone.

The SMSF and cryptocurrency worlds are already complicated enough — it’s no wonder so many people feel overwhelmed when these worlds collide.

One thing is certain: meticulous compliance and record-keeping is paramount, and Ascent Accountants are ready to help. We can also refer you to a trusted financial advisor or other expert in the cryptocurrency SMSF space who can continue to support you. Don't hesitate — reach out to us today and let's embark on this cryptocurrency adventure together!

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