Self Managed Super Fund Investment in Bitcoin and Cryptocurrencies

Whether it's in the news, in conversation or offered as a payment option, it's hard to avoid cryptocurrency. The recent surge in the price of Bitcoin and the speculative chatter about what it all means has seen a lot more SMSF investors taking cryptocurrency more seriously.

We're often asked how something as stringently regulated as an SMSF could invest in something as decentralised and untraditional as cryptocurrency. To help answer this, we've outlined a few key areas that SMSF trustees and advisers should consider if they're looking to add cryptocurrencies, like Bitcoin, into their portfolios.

Back to Basics

Before we get into the nitty gritty of cryptocurrencies, let's get back to basics. While cryptocurrencies have the same characteristics as traditional money, they don't exist in the same physical form. Much like cold hard cash, cryptocurrencies such as Bitcoin can also be used to pay for goods and services. The primary difference is that cryptocurrencies are decentralised digital currencies, which means they have no political or geographical borders. In the absence of a central bank or administrator, cryptocurrency transactions take place directly between users without the need for a third party like a traditional bank.

Following the early surge of Bitcoin, many SMSF investors are adding cryptocurrencies to their portfolios as an investment, rather than using it as a currency per se. Because of their decentralised nature, cryptocurrencies have many investors divided; SMSF trustees need to be aware of the risks and regulations of holding cryptocurrency in an SMSF.

Trust Deed & Investment Strategy

Unlike traditional investments, crypto assets don't generate an income, and the investment strategy is based purely on the expectation that the cryptocurrency will appreciate in value. The lack of defined return is divisive, with some investors arguing that crypto investments are inappropriate for SMSF, while others draw comparisons to gold and other traditional stores of value.

At this point, the Australian Tax Office doesn't recognise cryptocurrencies as 'currency' nor 'foreign currency' because it's not officially recognised as legal tender by any country. As it's considered an asset for capital gain, for tax reasons, the SMSF trust deed and investment strategy would need to allow for 'crypto-assets.'

Sole Purpose Test

The sole purpose of an SMSF fund is to provide retirement benefits to its members, or to their dependents, should its members die before retirement. Trustees of an SMSF, either considering or holding cryptocurrency, need to be clear that the investment can't be intertwined with personal assets. Doing so would breach the sole purpose test.

Identification and Ownership

To trade in cryptocurrency, you'll need a unique encrypted code, known as a wallet. The wallet essentially acts as the address which transactions are sent between. An SMSF needs its own wallet, entirely separate to any that you may have in your name for personal cryptocurrency investing. Any investments made into cryptocurrencies must be identified as belonging solely to the SMSF, and not mixed in with personal assets.

As wallets are virtual and only identifiable via an IP address, it can be difficult for the fund to have the asset registered in any name. Trustees wanting to invest in cryptocurrencies need to make sure the auditors of the SMSF can identify the following:

• Trading history for the wallet at the IP address. This needs to match up precisely with the transactions from the bank account of the fund. To ensure the accounts are easily traceable, it's recommended the SMSF opens a separate bank account for cryptocurrency trading. Auditors will check that the transactions are for the sole benefit of the SMSF, and not an individual.
• As the wallet can't demonstrate that the investment is held for the SMSF only, a deed of trust or similar document confirming the fund is the beneficial owner of the cryptocurrency, is required.

Valuation

Any assets held by a super fund must be valued at market value. SMSF trustees should be aware that any cryptocurrencies held by an SMSF will be adjusted to reflect the market value as at 30 June of the relevant financial year.

Tax Consequences

In the eyes of the ATO, Bitcoin and other cryptocurrencies are considered an asset. Selling them at a profit triggers a capital gains tax event which would similarly attract capital gains tax. On the flip side, if the asset is sold at a loss, a capital loss is triggered. It's worth mentioning that costs involved in trading cryptocurrencies can't be claimed as a tax deduction and instead, form part of the cost base of the crypto asset.

If the bitcoin is sold while members of the SMSF are in pension phase, the gain is exempt from any tax consequences.

H&R Block SMSF Solutions

Depending on your financial situation, a self-managed super fund (SMSF) can give you more control over your superannuation and retirement. With complicated rules and strict governance in place, those looking at investing in cryptocurrencies should always seek qualified and experienced advice.

The H&R Block SMSF Solutions team can provide you with a full range of SMSF services to help you set up, manage and maintain your SMSF. Talk to us today about planning for tomorrow.

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