Introduction submitted by
Having now read numerous of conflicting posts/articles/comments in relation to not only investing in Bitcoin but making use of Self-Managed Super Funds (SMSF) in order to do so it is clear to me that there is a significant interest in this topic and subsequently a lot of misinformation, some people have it right, others woefully wrong. Perhaps part of the problem is the ever changing set of rules the ATO seems to publish which subsequently becomes outdated when amendments are made, the old rules fly around the internet quoted as fact. Therefore I’ve decided to write a post to help guide others and perhaps get feedback as to what in my mind is the safest most secure way to make use of the SMSF investment vehicle to invest in Bitcoin and other cryptocurrencies. I will discuss the current tax treatment of cryptocurrencies, recent legislative changes and options to invest, namely direct investment into cryptos or through a hedge fund linked to the price of crypto exchanges, I’ll be honest, I won’t hide the fact that I think hedge funds are the way to go but the point is both options have merit and can technically be done whilst meeting SIS 93 requirements. Background
Since the Keating government implemented the compulsory employer contribution scheme in Australia back in 92 as a means for Australians to save and fund their own retirement as opposed to being reliant on government support, nearly every single employee in Australia will now have one or even several superfunds lying around, as of June 2017, Australia’s Superannuation industry has swelled to a total net value of 2.3 trillion. Most of these funds are industry or retail funds, from memory (although I may be wrong) there are about 500,000 + Self-Managed Super Funds, these funds are self-administered, every member is a trustee and every trustee is a member. Those more suited to a SMSF characteristically generally are educated in terms of financial literacy and prefer to manage and take charge of their own fund perhaps keeping in mind their own retirement strategy or also considering their overall portfolio’s and financial situation, they know what is best for themselves.
Australia’s SMSF sector is heavily regulated and rightly so by the SIS Act 1993. The ATO is charged with ensuring that SMSF’s adhere to all necessary rules and regulations. Currently the rulings from the ATO as to how these rules would apply to the treatment of bitcoin and other cryptos within the super environment are minimalistic at best, making it hard to navigate the waters of compliance. However there are a number of underlying restrictions that would apply to any SMSF’s considering cryptocurrencies as an investment. That’s not to say the ATO hasn’t addressed such eventualities, guidelines have been posted (in haste) whilst they prepare more comprehensive reports, what we have available now is somewhat in a gray area and aspects of it open to interpretation. How are cryptocurrencies taxed?
Under GST law, a 10% GST applies to supplies of goods and services. Money receives special treatment because it’s a medium of exchange and not something for final private consumption. Up until recently, the Australian Taxation Office (ATO) took the view that cryptocurrencies did not meet the definition of ‘money’ because they have an independent value rather than being a debt, credit or promise to make a payment, and they don’t meet the definition of money under GST law. The impact was that when people used digital currencies as payment, this could trigger GST twice; once on the goods or services being purchased, and also on the supply of the digital currency to the other party. So, the Government has changed the definition of money for GST purposes from 1 July 2017. Now, trades of cryptocurrency are disregarded for GST purposes, unless the trade is for a payment of money or digital currency (for example you are in the business of trading cryptocurrencies). Cryptocurrencies are now taxed in a similar way for GST purposes to foreign currency.
Crypto’s in a SMSF for tax purposes, gains and losses in the fund are treated in the same way as other assets in the fund. That is, CGT may apply to any gains made on the sale or exchange of the currency. Investing in Bitcoin & Other Cryptocurrencies
So to the big question, can a SMSF invest in cryptocurrencies? Arguably yes one way or another, a SMSF can invest directly or indirectly in cryptocurrencies but there are several factors to take into account before investing. It must be kept in mind that cryptocurrencies represent a high-risk instrument and should ideally be allocated a investment weighting that is in line with the investment strategy of the fund (although this can be amended), the trust deed allows for it at the time the investment is made (again, amendments can be made) and it represents an appropriate investment. However the main consideration in particular is of course the sole purpose test. The sole purpose test in the Superannuation Industry (Supervision) Act 1993 requires that the fund is maintained for the sole purpose of providing retirement benefits to your members, or to their dependents if a member dies before retirement. Trustees need to ensure that the risk associated to these currencies is in the best interests of the fund, writing up a minutes documenting the decision to invest in the cryptocurrency would be beneficial come audit time. Given, perhaps not the complexities, but rather the compliance & security issues that can and tend to arise from using SMSF and crypto together, I would advocate the use of a listed hedge fund as a medium in which to invest in crypto, on paper you buy units in a fund, I would like to hear peoples opinions. The Process – Setting up a Fund & Investing
If you have super monies and want to go about setting up a SMSF, then probably the easier would be to seek advice from a financial planner (preferably one who is also a member of the financial planning association of Australia)
You can search for FPA planners here at http://fpa.com.au
– Find a Planner
The benefit of an FPA planner is that they do tend to have more ethical requirements that must be adhered to otherwise they lose their license, the FPA do also tend to be rather vigilant in their supervision of associated financial planners. (there are around about 20,000 FPA members so it shouldn’t be too hard to find one near you)
You CAN also go to an accountant, but well, since July 2016, the accountants licensing exemption, Regulation 7.1.29 was removed meaning technically SMSF are regarded as financial products and that professional accounts now require licensing to be able to recommend, wind up or conduct any business with an interest in SMSF. A lot of accountants were caught out by this, many either continued to unofficially conduct business which lead to a lot of legal headaches, others desperately sought to retrain and gain silencing and others simply stopped dealing with SMSF. Either way, a financial planner probably is a safer bet, lets face it, they know more.
Once an authorized person has setup up a SMSF for you, you will need a bank account for which you can initiate a transfer of existing super monies or external contributions into this account (into the SMSF). Bitcoin/Crypto & SIS ACT - Potential problems investing directly in Crypto’s
Next step would be to sign up with a cryptocurrency exchange using your SMSF company details ( take your time to choose a reputable exchange) from here you can purchase cryptos such as bitocoin using your super bank account. Should you trade bitcoins, it is vital to keep careful records on such trades, date/consideration/quantity ect. Additionally these funds should be directed back into your SMSF bank account, these movements should be documented. You should take care to be as vigilant as possible when mixing retirement savings with cryptos, the ATO recently allocated additional funding to the auditing of SMSF, it has also been acknowledged that in general, investment strategies are woefully inadequate and do not reflect the best interests of trustee members. Be careful, amend your investment strategy, amend your trust deed, and take careful records with all your various accounts/wallets/exchanges ect. So you are properly armed come audit time, it may cost you a small amount in the short run to be compliant, but having been involved in many audits over the years, it’s always better to err on side of caution.
The sole purpose requirements as set out in Section 62 of SIS Act 93, restricts the provision of superannuation benefits by regulated superannuation funds to a range of prescribed or approved retirement or retirement related circumstances. Section 62(1)(a) requires such a regulated superannuation fund be maintained soley for one or more of the core purposes, what interests us here is that rather strictly a SMSF cannot directly or indirectly provide financial or any other benefit to its members prior to meeting a condition of release, most commonly retirement. This means that any movement or transfer between SMSF public IP addresses and a members public IP address even for the briefest of moments, would violate the sole purpose test and deem your fund non-compliant. An amusing scenario that illustrates the tenacity of the sole purpose test is as follows; let’s say a SMSF acquires artwork for the purpose of providing retirement benefits, perfectly legal however this artwork cannot be displayed or even stored at a members residence, it would be a violation of Section 62 if a member were to even glance at the picture, an entire SMSF could be deemed non-compliant should this occur, penalties include the loss of concessional tax treatment and the possibility of Trustees facing civil or criminal charges. Therefore most SMSF’s that acquire art tend to store it away under lock and key in dedicated depos.
A public key address in the context of bitcoin are not inherently connected to any person or entity, instead they are controlled by whoever is in possession of the matching private key. Individual SMSF members aren’t allowed to be in control of the SMSF’s bitcoin at any one point, instead the SMSF itself would have to be in control of the public key. Fun fact: you can also acquire bottles of wine with a SMSF, just don’t drink it! Direct Bitcoin Investment and SMSF Investment Strategy
Every SMSF must have an investment strategy that is reviewed regularly, personally I think these are just another bureaucratic box to tick as I’ve seen literally hundreds of strategies which are in short, just a sentence usually something along the lines of; ‘The fund may aim to obtain a rate of return exceeding CPI by 3% over a period of 10-15 years, investing in a portfolio which may include securities, property both domestically and overseas.'
This is not a strategy, it means nothing, but if you don’t have this basic line of financial dribble then you will be deemed non-compliant. Moving on, the most serious issue in regards to direct bitcoin investment is the risky nature of bitcoin as an investment, given historically high degrees of volatility, the lack of any income yield and the only potential income being capital growth you must be very careful in the way you word both your trust deed AND investment strategy. SMSF’s generally can invest in high risk instruments such as derivatives or CFD’s but the appropriate wording is required to avoid potential lawsuits down the track. Then you need to consider how far you want to push the limits of compliance, actively trade the volatility or adopt a buy and hold strategy? The former may constitute carrying on a business which again carries its own implications. Security Issues It cannot be stressed enough that assets within a SMSF must have adequate protection put in place to protect against any potential loss, using artwork as an example again, artwork moved into a SMSF must be insured within seven days of acquisition. It must be recorded in writing that significant due diligence was undertaken to protect assets with a SMSF specifying what was actually undertaken. In the context of artwork, it could be that a 24/h security storage facility was leased to house the artwork and that the storage room itself was temperature controlled and artwork appraised and insured to prudent enough level. The same issue arises with Bitcoin, SMSF trustee’s control the bitcoin and to avoid consequences, it must be documented that adequate security measures were in place to protect your bitcoins from hacking, theft, ect. So perhaps consider installing Norton AntiVirus. (joke) Investing in a Crypto Hedge Fund
Blockchain assets being of digital asset could be considered relatively new, assets that the larger institutional funds in financial markets have started to jump onto, albeit considerably late, the demand is there! The advantages of using a crypto linked hedge fund are simplicity, security and reportability, all of which are essential if you want to invest in cryptocurrencies through the medium of a SMSF, whilst avoiding auditing problems. Over the past 12 months, Hedge funds linked to the price of cryptocurrencies have been popping up everywhere. I make it no secret that I like and use EXANTE, they were the very first Bitcoin Hedge fund incorporated in 2012 achieving a 10,262 % performance in 2017. Recently larger players in financial markets have started jumping onto blockchain assets, albeit considerably late, so investor choice is growing by the day. I much prefer and am a huge fan of using crypto-linked hedge funds as a means of investing in crypto using SMSF monies, avoiding auditing problems, added simplicity, security, all of which I have found in EXANTE, I also like them for their flexibility and for tax purposes.
So how does EXANTE make it work? Essentially, you buy units in hedge fund which 100% matches the price of bitcoin (or other cryptocurrencies, they have a lot). Big advantageous with EXANTE is that the potential risks of direct cryptocurrency investment is mitigated. Investment strategy requirements are bypassed, amendments to documents avoided as you are just buying units in a regular fund. Security problems are alleviated. When you buy units in the hedge fund, the fund instantly buys crypto, crypto is secured in storage, private keys are exported into a crypt-container, using algorithms the container password is split into three parts and distributed to distributed to three different bank vaults across the globe. Should a single depository be compromised no funds are lost, this is a very important consideration for both compliance and personal reasons as you are using retirement funds for speculative investments. Auditing risks are reduced significantly as you leave a clear paper trail, investments with EXANTE are secured, regulated by MIFID & Audited by KPMG. You gain the ability to short, for example – taking a short position on BCH (via units in hedgefund) You gain ability to leverage. You can request to register a demo account here with EXANTE - https://exante.eu/p/6537/fromalz/
to try out trading cryptocurrencies with theoretical dollars before opting to register a live account. If there are any Aussies, I’d like to hear your opinions.
I thought it was interesting so I figured I'd share. This was in eastern suffolk (New York)--ie, probably not a huge fund. The guy was really curious, though fairly skeptical. He said he was most interested in 'using the blockchain to store records.' submitted by
I'd be very surprised if it doesn't reach gold market cap of $600,000/ bitcoin by the end of 2014.
The big hedge funds now have to get in because the highest performing hedge fund from last year was just announced and was the only one invested in bitcoin http://www.hedgeweek.com/2013/11/25/193637/bitcoin-fund-best-performing-hedge-fund-year-date
. So this year all the others will need to be in and that will be billions flowing into bitcoin for the first time. And they will be investing with other peoples money and people always invest other people's money faster than their own.
Up to now bitcoin has been driven by real people putting in their own real money.
The hedge fund flood will be totally different. Much faster influx and higher. Price pressure.
It COULD reach $600,000 in a month. The rate of acceleration into bitcoin is getting faster. The exponent is increasing itself exponentially.
It did 10 x in 4 months but it did 4x in onemonth of that. It could easily start doing 10x a month with the hedge fund flood to come.
10 x times 10 x gets you to $100,000 then its only 6 x to gold market cap although things may temporarily slow at gold marketcap. However at that point it is still undervalued becuase the total currencies of the world will also be investing a portion of their holdings in bitcoin becuase bifcoin is both a wealth protector like gold AND a currency.
At that point it may take more time to intergrate as currency and not just have the goldbug type hedge money safety portion driving acceleration .
If you like my analysis its fair to show it 1M4KwzaWTpqF4mnZVoTTttJstMb6Xf1D1W or bitcointip.
Also there are many robotic naysayer downvoters on bitcoin
now so remember to really reddit. Don't just be passive.
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