Introduction
In Australia, superannuation is a mandatory savings scheme that is designed to help Australians save for retirement.
While traditional superannuation funds often invest in stocks, bonds, and other assets, Self-Managed Super Funds (SMSFs) offer greater flexibility, allowing members to choose how their funds are invested, including the option to invest in Bitcoin.
With Bitcoin’s increasing price and appeal, many SMSF trustees are considering it as part of their retirement portfolio. However, there are rules and regulations governing how SMSFs can hold and trade digital assets. This guide will cover the key things you need to know about investing in bitcoin through super.
“(SMSFs are) …the only option for direct bitcoin investment because traditional super funds are restricted to pre-approved, often more conventional, asset classes.”
Your top 3 questions answered
1. Can I buy Bitcoin with my superannuation in Australia?
Yes, you can. However, this is currently possible only through a Self-Managed Super Fund (SMSF). Traditional retail or industry super funds (such as AustralianSuper or Australian Retirement Trust) don’t allow direct investment in digital assets because Bitcoin is not on their approved product lists. An SMSF gives you the flexibility to choose your investments, including Bitcoin, provided you follow strict regulatory guidelines.
2. What is an SMSF, and why is it the only way to buy bitcoin with super?
An SMSF is a private superannuation fund that you manage yourself, unlike retail or industry funds where a fund manager makes investment decisions. It can have up to six members, and you, as a trustee, decide how to invest the funds - whether in shares, property, or alternative assets like bitcoin. It is the only option for direct Bitcoin investment because traditional super funds are restricted to pre-approved, often more conventional, asset classes.
3. Is it legal to invest in Bitcoin through an SMSF?
Yes, it is legal, as long as you comply with Australian superannuation laws. The Australian Taxation Office (ATO) recognises assets like Bitcoin as capital gains tax (CGT) assets, like property, not currency. This means your SMSF can invest in Bitcoin, but the investment must align with your fund’s trust deed and investment strategy, and meet the requirements of the Superannuation Industry (Supervision) Act (SISA).
Risks of Investing in Bitcoin Through an SMSF
Investing in bitcoin through an SMSF involves several risks that should be carefully considered:
- Volatility: Bitcoin is known for its price fluctuations. Its value can swing dramatically within short periods, which could have a significant impact on your retirement savings. These fluctuations could pose a risk to the stability of your portfolio, especially if bitcoin comprises a large portion of your SMSF investments.
- Security: One of the major risks with bitcoin is its vulnerability to online hacks or the loss of private keys. If your private keys are lost or stolen, you may lose access to your Bitcoin permanently. Unlike traditional bank accounts or investment platforms, there are no compensation schemes in place to recover lost or stolen digital assets, meaning the risk of theft or mismanagement is entirely on you.
- Compliance: SMSFs must comply with strict superannuation laws, and any failure to do so can result in serious consequences. For instance, mixing personal and SMSF assets, or using SMSF funds for non-retirement purposes, could lead to penalties, disqualification as a trustee, or the loss of tax concessions. It's crucial to maintain strict compliance to avoid these costly mistakes.
- Liquidity: While Bitcoin is considered a liquid asset, meaning it can be bought and sold quickly, SMSFs must ensure they can meet obligations such as pension payments without being forced to sell bitcoin in unfavourable market conditions. If the market is down, selling bitcoin to meet these obligations could result in realising a loss, affecting the fund's overall performance.
Given these risks, it is important to approach Bitcoin investment with caution. As a high-volatility, high-reward asset, it is advisable to diversify your portfolio and manage potential downsides effectively.
Did you know?
In 2024, Australians held around AUD $1 billion in digital assets within Self-Managed Super Funds (SMSFs), a massive jump from just AUD $240 million three years earlier. With Bitcoin's dominant market cap, it is likely that a large portion of these holdings are invested in bitcoin.
Mistakes to Watch Out for in SMSF Bitcoin Investments
- Personal Use: The most important rule when using your SMSF to invest in Bitcoin is that the investment must strictly be for retirement purposes. You cannot use bitcoin for personal reasons before retirement, and any personal use of SMSF funds is prohibited.
- Active Trading: SMSFs are not meant for day trading. The ATO requires that the investment strategy of your SMSF focus on long-term retirement growth. Frequent buying and selling of bitcoin could be seen as contravening the rules, especially if it does not align with the fund’s long-term investment strategy.
- Ignoring the Fund’s Trust Deed: The SMSF trust deed is a legal document that governs how the fund operates. If your deed does not allow for digital asset investments, you must amend it before purchasing bitcoin.
Regulation and Compliance
In Australia, Bitcoin is considered property for tax purposes. This means it can be included in your SMSF as an asset, but there are strict regulations that need to be followed:
- Investment Strategy: Every SMSF must have a clear and documented investment strategy. This strategy must outline how bitcoin fits into your portfolio and how the risks associated with it are managed. If bitcoin is not mentioned in the strategy, the fund may not be compliant.
- Acquiring Bitcoin: SMSFs are prohibited from acquiring assets from related parties, such as family members or business associates, unless those assets are listed securities or business real property at market value. Since Bitcoin isn’t a listed security, it must be purchased from an unrelated party, such as an exchange.
- Sole Purpose Test: The sole purpose test mandates that an SMSF must exist solely to provide retirement or death benefits, not for current personal use. This means that Bitcoin held within an SMSF cannot be used for day-to-day spending or treated as a collectible. It must be held exclusively as an investment for retirement.
- Trustee Obligations: SMSF trustees have fiduciary duties, meaning they must act in the best interests of the fund members. This includes ensuring that all investments, including bitcoin, are in line with the fund’s goals and objectives, as well as ensuring compliance with ATO rules.
- Valuation and Reporting: One challenge with bitcoin in an SMSF is accurately valuing it. The price of bitcoin can fluctuate rapidly, so it’s important to establish a consistent and reliable method for determining its value. This will be necessary for compliance purposes, especially when preparing annual audits and tax returns. Bitaroo offers SMSF-compliance reporting for this purpose.
- Tax Considerations: The ATO treats bitcoin as a capital gains tax (CGT) asset. This means that if you sell your bitcoin for a profit, you will be subject to CGT. The tax rate depends on the phase your SMSF is in (accumulation or pension phase).
- Gains in the Accumulation Phase (when the SMSF is growing the fund’s value before benefits are paid to members): If your SMSF sells bitcoin during the accumulation phase, the gain is taxed at the SMSF tax rate of 15%. The CGT discount of 33.33% does not apply to SMSFs.
- Gains in the Pension Phase (when the SMSF is paying retirement benefits to members): If your SMSF is in the pension phase, any capital gains from the sale of bitcoin are tax-free.
- Losses: Losses from bitcoin can offset other taxable gains within the SMSF, reducing the overall tax liability.
You must track every bitcoin transaction (buy, sell, or trade) for annual audits and tax reporting. The ATO requires valuations in Australian dollars, based on the fair market value from a reputable exchange as of 30 June each year.
Audits and Record Keeping
SMSFs are required by law to undergo an annual audit, and your bitcoin holdings will be included in this audit. Proper record keeping is essential for compliance with the ATO’s regulations. The auditor will need to verify the transactions, value of the bitcoin, and whether the investment is in line with the SMSF’s investment strategy.
Here’s what you need to consider when it comes to auditing and record keeping:
- Transaction Details: Keep accurate records of each bitcoin transaction, including the date of purchase, the price, and the exchange used. This is important for calculating CGT when you sell or transfer the asset.
- Storage and Custody: Ensure that your bitcoin is stored securely. This may involve using a reputable custodian or a secure offline wallet (cold storage). The ATO will expect your fund to have robust security measures in place to prevent theft or loss.
- Ongoing Compliance: SMSF trustees must ensure that the fund continues to comply with all regulations, even as bitcoin’s price fluctuates. The ATO may require proof that the investment is still within the fund’s strategy and not being used for personal purposes.
Setting Up an SMSF to Buy Bitcoin
If you are considering using your SMSF to invest in bitcoin, we have outlined all the steps in great detail in this article: SMSF Setup Guide for Australian Investors
Allocating Bitcoin in an Existing SMSF
If you already have an SMSF and want to allocate a portion of the fund to Bitcoin, the process is similar to setting up an SMSF for Bitcoin investment. However, you will need to review your existing investment strategy and possibly amend the trust deed to include digital assets.
Here is how to allocate bitcoin in an existing SMSF:
- Review Your Investment Strategy: Make sure that your current strategy allows for cryptocurrency investments. If not, you will need to amend it to include Bitcoin.
- Consult a Financial Advisor: It is wise to consult with a financial advisor or SMSF specialist, ideally one that specialises in Bitcoin, to ensure the decision aligns with your overall retirement goals and that all compliance requirements are met.
- Update Fund Documents: Amend the trust deed, if necessary, to allow for “cryptocurrency investments.” Ensure that all changes are compliant with the ATO regulations.
- Create an Exchange Account: Open an SMSF account with an exchange that allows for bitcoin purchases. Ensure they are a registered and reputable exchange, and ideally a Bitcoin-only exchange. While it is important to separate your personal assets with your SMSF assets, you can use the same exchange for all your Bitcoin purchases, as long as you ensure to keep the accounts separate.
- Make the Investment: Once your strategy and documents are updated, you can proceed with purchasing bitcoin through your SMSF, following the same process as setting up a new SMSF. Unfortunately, de-banking is a huge issue in Australia and the Australian Treasury is aware of this issue. Until that is resolved, prepare accordingly and plan your bank transfers in advance. For more information about banks’ restrictions, click here: https://www.bitaroo.com.au/banks-restrictions/
Conclusion
Buying bitcoin through your superannuation via an SMSF can be an excellent way to diversify your portfolio and gain exposure to the growing Bitcoin market. However, it is crucial to follow the rules, regulations, and compliance guidelines set out by the ATO to avoid any legal or financial complications.
If you are considering investing in Bitcoin through your super, it is advisable to seek professional advice from an SMSF specialist to ensure everything is set up correctly and compliant with all regulations. By doing so, you can make the most of this exciting opportunity while securing your retirement future.
Disclaimer:
The information provided in this article is for general informational purposes only and should not be considered as financial or legal advice. Investing in Bitcoin through a Self-Managed Super Fund (SMSF) involves risks, including volatility, security concerns, and regulatory compliance requirements. It is important to consult with a qualified financial advisor or tax professional before making any investment decisions. The laws and regulations surrounding SMSFs and Bitcoin investments may change, and you should ensure that any investments comply with the current legal framework. The Australian Taxation Office (ATO) and other regulatory bodies enforce strict rules regarding SMSF investments. You are responsible for ensuring that your SMSF complies with all relevant regulations and tax obligations.
