Compliance with cryptocurrency investments for SMSFs

Cryptocurrency and SMSF

For the last couple of years, cryptocurrency has been discussed in a popular forum as an investment tool. Due to its lucrative nature, investors’ focus has switched to cryptocurrencies. A self-managed super fund is a vehicle used by members to explore various investment options. With cryptocurrencies in the picture, they’re thinking about investing in Bitcoin, Ethereum, Stellar, and other digital currencies for their self-managed super fund.

The popularity of Bitcoin among trustees and members of self-managed super funds has prompted the Australian Taxation Office (ATO) to press down on regulatory rules and tax obligations.

Oxford Dictionary of English defines Bitcoin as “A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”.

Bitcoin has become a hot commodity among speculators. If you want to buy something using bitcoin you need to make sure the seller accepts the cryptocurrency. And because it is not regularised or operated by the central bank, investors have the impression that Bitcoin will be considered a foreign currency for tax purposes.

The Australian Taxation Office (ATO) issued tax determination 2014/25 and 2014/26 in 2014, stating that Bitcoin is not a foreign currency and will be considered as a CGT asset under the ITAA 1997.

Before you decide to invest in cryptocurrency through your SMSF, you should know a few things.

Is it possible for SMSFs to invest in cryptocurrencies?

Cryptocurrencies like bitcoin are CGT assets, and SMSFs can buy, sell, and invest in them just like any other asset. When an SMSF engages in these transactions, it must adhere to the same regulatory obligations as conventional asset investments.

The governing guidelines of a fund and its investment strategy.

Because cryptocurrency is an asset, the SMSF must make sure that digital currency investments are permitted under the trust deed. The fund’s trustees may need to alter their current trust deed or even issue a new deed.

When assessing the fund’s investment strategy, make sure to keep an eye on it and, if necessary, change it to include cryptocurrencies.

Before investing in cryptocurrency, SMSF trustees and members should think about the investment’s level of risk. The fund’s investment plan can then be reviewed and, if necessary, updated by the trustees and members to verify that the investment being considered is approved.

Ownership

Trustees and members are required by the super laws to keep their fund’s assets separate from their personal assets. The cryptocurrency investments of an SMSF must be stored and managed independently from the trustees’ and members’ personal or business investments. This includes verifying that the cryptocurrency is clearly owned by the SMSF. This means the fund must keep a distinct cryptocurrency wallet for the SMSF from the wallets used by trustees and members personally and be able to prove it.

Valuation

SMSFs must value their cryptocurrency interests in accordance with the ATO’s valuation rules. The fair market value in Australian dollars will be determined by a credible digital currency exchange or website that publishes its rates openly.

The value of cryptocurrency is always fluctuating. The ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on past cryptocurrency values for assessing member balances at the end of June.

Sole purpose test

The sole purpose test stipulates that an SMSF be managed solely to provide members with a retirement benefit. This leg can be satisfied if it can be demonstrated that the SMSF’s members are not receiving any current benefits, such as rebates or commissions, because of the investment.

Conclusion

Cryptocurrency can be a good way for SMSFs to develop their members’ retirement funds. However, we must evaluate the risk because price volatility may have a negative impact on retirement funds. Before investing in it, the trustee or member must meet the requirements listed above.

If you’d like to learn more, please contact us at weare@optimisers.com.au