By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth
Any trustee of an SMSF that has invested in cryptocurrency has probably asked the question, "Is it taxable in Australia?" It certainly can be and, in this article, we will look at how the most common cryptocurrency transactions can be taxed.
Whether tax is payable by an SMSF depends on the circumstances; sometimes, it can be taxed just like any other income, taxed under the capital gains tax rules and at other times, it can be completely tax-free.
Generally, cryptocurrency describes a digital asset that is encrypted to control the generation of additional units and how transactions are verified on a blockchain.
Nearly all cryptocurrency is independent of a central bank or government, although there are one or two exceptions where it is accepted as a currency overseas. Unlike the official currency of a country, cryptocurrency is treated just like any other asset for tax purposes. This means when a transaction involving the creation, trade or use of cryptocurrency occurs, an asset (the cryptocurrency) is being exchanged for goods and services, cash, given as a gift or exchanged for another cryptocurrency.As cryptocurrency is treated as an asset for tax purposes, a capital gains tax event occurs if it is 'disposed of'. Disposal of cryptocurrency can occur if it is:
- sold or given as a gift,
- traded or exchanged, including swapped for another cryptocurrency,
- converted by exchanging it for an official currency of a government, or
- used to acquire goods or services.
In most situations, if an SMSF disposes of the cryptocurrency, then the whole or part of any capital gain made from the disposal can be taxed. The amount of the capital gain that is taxed depends on the time the cryptocurrency has been owned by the SMSF.
If it has been owned for up to 12 months, then the whole gain will be taxable, but if it is owned for longer than 12 months, then 2/3rds of the capital gain will be taxable. Of course, the proportion of any taxable capital gains that relate to income streams in the retirement phase will be tax-exempt in the SMSF.
Here's an example:
The Roger Superannuation Fund bought one Ether (ETH) on 1 July 2019 for A$433, including costs. On 30 October 2021, he sold his ETH for cash for A$5,233, including costs. The sale meant that the fund made a net capital gain of $4,800.
As the ETH had been owned for more than 12 months, the fund was eligible for a 1/3rd CGT discount. This meant that the taxable capital gain was $3,200. As the fund is wholly in the accumulation phase, it would be liable for 15% tax on the taxable capital gain, which is $480.
Trading or exchanging one cryptocurrency for another is treated as the disposal of one CGT asset and the acquisition of another CGT asset. Because an asset (the cryptocurrency being disposed of) is being exchanged for another asset (the cryptocurrency being acquired), the market value of the cryptocurrency being disposed of and acquired is converted to Australian currency to calculate the capital gain or loss for tax purposes.
Example:
The Geoff Superannuation Fund bought one Bitcoin (BTC) on 1 July 2021 for A$45,800. On 10 November 2021, he exchanged his Bitcoin for 138.15 Binance Coin (BNB), which had a total value of A$634.80. The exchange meant that the fund made a net capital gain of $41,898; however, as the Bitcoin had not been owned for more than 12 months, it was not eligible for the 1/3rd CGT discount.
As the fund is wholly in the accumulation phase, it would be liable for 15% tax on the taxable capital gain, which is $6,204.70.
Some SMSFs buy and hold cryptocurrency as an investment with the intention to make a capital gain at its disposal. This will occur if the capital proceeds from the disposal are more significant than its cost base. A capital loss occurs if the capital proceeds from the disposal are less than the cost base of the cryptocurrency.
If the cryptocurrency has been held by the SMSF as an investment for more than 12 months, it may be entitled to a one third CGT discount which reduces the taxable amount of the capital gain when the cryptocurrency has been disposed of. In the case of a capital loss, the capital gain is reduced, and if there is an amount of capital loss remaining, it can be carried forward and offset against the fund's future capital gains.
Example:
The Michael Superannuation Fund purchased 100k of Stellar lumens (XLM) on 6 December 2019 for 8 cents each with a total cost of $8,000. On 25 November 2021, the fund sold the Stellar lumens for 45 cents for a total amount of $45,000, resulting in a capital gain of $37,000.
On 17 May 2021, the fund purchased 10k of Stellar lumens (XLM) for 91 cents each, with a total cost of $9,100. On 26 June 2021, the trustees decided to sell the Stellar lumens for 32 cents each for a total amount of $3,200. This resulted in a capital loss of $5,900.
To calculate the amount of the taxable capital gain, the capital gain of $37,000 will be reduced by the capital loss of $5,900, and the 1/3rd discount applied to the result. The net capital gain is $31,100 less a 1/3rd CGT discount of $10,367, which results in a taxable capital gain of $20,733. The tax payable on the net capital gain after the discount is $3,109.95 ($20,733 x 15%).
There are times when cryptocurrency is treated as income and taxed in the SMSF, mainly if the fund is considered to be a trader rather than an investor. However, even if the fund is considered an investor, there are a few possibilities where the cryptocurrency received by the fund would be treated as income of the fund.
This would include:
- the SMSF being paid in cryptocurrency (as a substitute for cash such as rent for a property)
- Staking rewards (similar to dividends)
- Airdrops (similar to bonuses)
- DeFi interest (similar to bank account interest)
- Referral fees (similar to the commission)
Income tax is charged on the fair market value of the coins or tokens received by the SMSF. For example, if the SMSF received Ether (ETH) which had a market value of A$485 and was given in payment for the rent of a property, then the A$ value of the cryptocurrency received would be included in the assessable income of the SMSF. If the SMSF later disposes of the Ether (ETH), then a capital gain or loss may arise.
The ATO considers that airdrops received from an established crypto coin or token are considered ordinary income at the market value of the tokens on the date they are received by the fund. Airdrops are akin to bonuses.
An airdrop will consist of two tax events – the first is the amount that is considered assessable income, and the second is the capital gains tax event that will arise if the SMSF decides to sell or trade the cryptocurrency. For example, if the SMSF is airdropped coins or tokens with a market value of $200, it will be included in the fund's assessable income. In future, when the cryptocurrency is disposed of then, a CGT event will occur, and the cost base of the coins or tokens is accepted as their value when they were first airdropped to the SMSF.
In some instances, signup and referral bonuses may be given in cryptocurrency for introducing users to a service. These are considered similar to the SMSF receiving a commission for the introduction, and the value of the coins at the time of receipt is considered to be the ordinary income of the fund. Disposal of the cryptocurrency in the future, then a capital gain or loss may arise.
It is possible for the trustees of an SMSF to lend the cryptocurrency, and payment for its use is made to the lender as DeFi interest, similar to interest on an investment, or staking rewards which is similar to dividends. These payments are assessable income of the SMSF and taxable.
The SMSF may receive other payments which could arise from the activities being treated as carrying on a business. These may include buying and selling cryptocurrency as a trader, mining coins or tokens, or entering into options trading with cryptocurrency.
Whether the SMSF can undertake these activities as part of the trustee's responsibilities will depend on whether the fund complies with the requirements of the investment standards of the Superannuation Industry (Supervision) Act and Regulations. In these circumstances, the fund should seek professional advice or an opinion from the regulator to see whether there are any compliance issues if the fund was to enter into any of these activities.
However, in some cases, there may be a change in the contract address, and the SMSF ends up with an issue of new coins or tokens and may also hold old coins or tokens, albeit at a reduced value. This split may be treated as a fork rather than a swap, and any may result in a CGT event occurring.
Any SMSF involved in acquiring or disposing of cryptocurrency needs to keep records relating to cryptocurrency transactions. This assists in determining whether the acquisition or disposal is a capital gains event, whether it should be treated as income or an expense of the SMSF or has no tax consequences.
Records of all cryptocurrency transactions need to be retained by the SMSF for at least five years and should include:
- The dates the cryptocurrency transactions took place,
- The value of the cryptocurrency in A$ when the transaction occurred,
- Details of the transaction – for example, whether it was income or expense of the fund, given in exchange for another cryptocurrency etc.
- Receipts for the transaction involving the receipt or transfer of the cryptocurrency
- Records relating to exchanges and wallets owned by the SMSF
- Any agent, legal, accounting and other costs associated with the cryptocurrency transactions
- Records of digital records and keys.
The fund's accountant, administrator and ultimately the auditor of the fund will pay particular attention to the cryptocurrency transactions undertaken by the SMSF.
Records of cryptocurrency transactions are essential, particularly where it may have been lost or stolen. The trustee of the SMSF will need to provide evidence that it actually owned the relevant cryptocurrency and that it was lost or stolen, or it is not possible for it to be accessed. In these situations where a genuine loss or theft can be proven, it will result in a capital loss for the SMSF.
The types of evidence that will be required includes:
- when a private key was acquired and lost by the SMSF
- the wallet address relating to the lost private key
- the cost incurred by the SMSF to acquire the lost or stolen cryptocurrency
- the amount of cryptocurrency in the wallet at the time private key was lost
- that the wallet was controlled by the trustee of the SMSF (for example, transactions linked to the SMSF trustee's identity)
- that the trustee or director of the corporate trustee owns the hardware that stores the wallet
- that the trustee holds a verified account from a digital currency exchange or is linked to the trustee's identity.
Whether the use of cryptocurrency by the trustee of an SMSF as an investment or to conduct fund transactions is appropriate. It really comes down to the trustee and members and whether acquiring the cryptocurrency is consistent with the purpose of superannuation, the fund's investment strategy and the investment standards of the Superannuation Industry (Supervision) Act.
The taxation implications of an SMSF transacting with cryptocurrency depends on a number of factors, such as the purpose for which it is acquired or disposed of and the time it has been owned by the fund. One thing that's certain is for trustees to keep accurate records to support those transactions otherwise, it may end up with the fund paying more tax than it should.
To learn more about Director ID changes tune into the latest episode of SMSF Adventures with SuperConcepts here.
