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Self Managed Super Funds (SMSF)

Cryptocurrency and tax – when does it apply?

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

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, sometimes it can be taxed under the capital gains tax rules (CGT) and at other times it can be completely tax free.

Generally, cryptocurrency describes a digital asset which is encrypted to control the generation of additional units and how transactions are verified on a blockchain. Nearly, all cryptocurrency is totally 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.

CGT Events

As cryptocurrency is treated as an asset for tax purposes, a CGTevent 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 other 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 two thirds of the capital gain will be taxable. Of course, the proportion of any taxable capital gains that relate to income streams in retirement phase will be tax exempt in the SMSF.

 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 one third CGT discount. This meant that the taxable capital gain was $3,200. As the Fund is wholly in accumulation phase it would be liable for 15 per cent tax on the taxable capital gain which is $480.

Trading or exchanging cryptocurrency for another cryptocurrency

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 one third CGT discount.

 

As the Fund is wholly in accumulation phase it would be liable for 15 per cent tax on the taxable capital gain which is $6,204.70.
 

Cryptocurrency as an investment

Some SMSFs buy and hold cryptocurrency as an investment with the intention to make a capital gain on its disposal. This will occur if the capital proceeds from the disposal are greater 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. 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 $100,000 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 $10,000 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 one third discount applied to the result. The net capital gain is $31,100 less a one third 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 per cent).
 

 

Income
There are times when cryptocurrency is treated as income and taxed in the SMSF particularly 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:


1. SMSF being paid in cryptocurrency

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$485 and was given in payment for rent of a property then the A$ 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.

2. Airdrops

The Australian Taxation Office (ATO) considers that airdrops received from an established crypto coin or token are considered ordinary income at their 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.

3. DeFi interest and staking rewards

It is possible for the trustees of an SMSF to lend the cryptocurrency and a 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.

4. Signup and referral bonuses or fees

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 are considered to be ordinary income of the fund. Disposal of the cryptocurrency in the future then a capital gain or loss may arise.

Other Income

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.

What’s not Taxable

Transferring crypto between the SMSF’s wallets

Moving cryptocurrency between different wallets or accounts held as trustee of the SMSF is not a taxable event and doesn't trigger a capital gain or loss. The reason is that there is no change in the owner of the cryptocurrency. However, it’s important to keep a record of the movement between the different wallets to retain details of the cost base of the cryptocurrency which will be used to work out whether a capital gain or loss has been made when it is sold, exchanged or disposed of by the SMSF.
The SMSF’s digital wallet that holds the cryptocurrency may include different types of cryptocurrencies and each cryptocurrency is treated as a separate asset for CGT purposes.

Token address change

When a cryptocurrency changes its underlying technology for example if it goes from one provider to another there are no tax liabilities for the SMSF as there is no change in ownership.

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 any may result in a CGT event occurring.

Keeping Records

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 5 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.

Loss or theft of cryptocurrency

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.

Where to now?

It is important to understand whether the use of cryptocurrency by the trustee of an SMSF is intended as an investment or to conduct fund transactions. 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.
 

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
  • SMSF News
  • Self Managed Super Funds (SMSF)
  • Superannuation
  • Tax
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