[SMSF Assets series] ATO recommends licensed financial advisory to SMSF trustees investing in Crypto Assets

November 23, 2022

Our recently published Nov 3rd Practice Update contains a recommendation from the ATO for trustees of SMSFs to seek professional advice from a licensed financial adviser before investing in crypto assets. It also contains a warning that some organisations offering to help set up such an investment are not licensed to provide financial advice, and as such do not offer the same protections and recourse as licensed financial advisers. When investing in crypto assets, the trustee must ensure that it is allowed under the fund’s trust deed and investment strategy, and that the trustee has considered the level of investment risk. From a regulatory perspective, the crypto assets must be owned by the fund and held separately from the trustee’s personal or business assets in a digital wallet. The investment must also be valued at market value in line with the ATO’s valuation guidelines.

Self-Managed Super Fund (SMSF) members and trustees may not be adequately equipped to make informed financial decisions, particularly with highly volatile crypto assets.

When investing in crypto assets, SMSF members and trustees should consider seeking professional financial advice. A licensed financial adviser can help determine whether crypto assets are appropriate for an SMSF and provide guidance on investing in crypto assets.

Investors should consider the following key points when investing in crypto assets:

  • As on the date of this writing, crypto assets are not regulated and therefore investors do not receive the same protections as they do when investing in regulated financial products.
  • The value of crypto assets can be volatile and investors could lose all their investment.

Typical risks that are inherent to the asset class of crypto for SMSF investors include (but not limited to):

  • Investors may have difficulty converting their crypto assets back to cash, especially during a market downturn.
  • Investors should be aware that some crypto asset exchanges are not subject to Australian anti-money laundering and counter-terrorism financing (AML/CTF) laws and may have little or no regulatory oversight.
  • Investors should be aware that crypto assets are usually not backed by any asset or government, or subject to consumer protections.
  • Investors should understand how crypto assets are taxed, before investing.
  • Investors should be aware that crypto assets are not recognised as legal tender in Australia.
  • Investors should be aware that crypto assets are not deposits or other liabilities of a bank or other authorised deposit-taking institution (ADI).
  • Investors should be aware that crypto assets are not protected by the financial claims scheme or any other compensation scheme.

The ATO has previously stated that “SMSFs must ensure their investments in crypto assets are valued in accordance with ATO valuation guidelines for SMSFs”.

Source: https://www.ato.gov.au/individuals/Investments-and-assets/crypto-asset-investments/what-are-crypto-assets-/

In general, the ATO will treat cryptocurrency ‘like property’, and will therefore tax cryptocurrency holdings as if they were investments in shares and other assets. For tax purposes, crypto assets are not a form of money.

Why are cryptocurrencies not your typical investment asset class?

Cryptocurrencies are a type of digital currency like Bitcoin, Ethereum, and Litecoin. These are generally volatile assets that are largely unregulated by governments and are prone to extreme price swings.

Bitcoin is the oldest and best-known cryptocurrency, but there are hundreds of others. Bitcoin’s price has declined sharply to AUD$ 26,000 (as on date of this writing) since it hit an all-time high of more than AUD$ 90,000 on April 14, 2021. In conclusion, having noted the peculiarities and inherent risks associated with cryptocurrencies, purely for tax purposes they are more akin to property, such as shares or collectibles. Gains or losses from disposing of crypto assets are treated as capital gains or losses. If you make a profit on crypto assets, you may have to pay tax on that profit, depending on your personal tax circumstances. The peculiar position of cryptocurrencies in the world of investment asset classes justifies the recommendation by ATO for SMSF trustees to consider seeking professional advice from a licensed financial advisory to SMSF trustees before investing in Crypto Assets.

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