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I was sitting in a coffee shop the other day and overheard a conversation about someone buying Bitcoin in their self managed fund. While sitting there, I started to ponder this question and although my initial thoughts were "surely that would breach the sole purpose test as you don't physically have an asset", I thought I would do some further research into this area. To my surprise, the Australian Taxation Office (ATO) has recently issued some guidance on this very subject, which confirms that SMSFs are not specifically prohibited from investing in cryptocurrencies.
To be an acceptable investment, the cryptocurrency investment must be:
(a) allowed under the fund's trust deed;
(b) be in accordance with the fund's investment strategy; and
(c) comply with the SIS Act and Regulations in relation to investment restrictions.
Some of the specific issues that the ATO have highlighted about SMSF investment in cryptocurrencies include:
To satisfy the SIS separation of assets requirement, there must be clear evidence of a separate cryptocurrency wallet for the SMSF (i.e., it must be separate from any personal wallets of the trustees and members).
Trustees must value the cryptocurrencies according to ATO guidelines (ie, valuation is required in Australian dollars and it represents a fair market value. This must be obtained from a reputable digital currency exchange or website that publishes its rates publically).
The SMSF is unable to acquire any cryptocurrencies from a related party as they are not listed securities, and therefore do not meet the exceptions for assets acquired from a related party.
Where affiliate fees or commissions associated with the fund's cryptocurrency investment are paid to a trustee or member personally, the sole purpose test is likely to be breached.
The SMSF can make an in-specie lump sum payment to a member by transferring the cryptocurrency to the member (assuming the trustee or member meets a condition of release). However, pension payments can not be satisfied this way (i.e., pension payments must be paid to the member in cash).
The other thing to note in relation to cryptocurrencies is that they are subject to capital gains tax (CGT), as the ATO views them to be property. Accordingly, if the SMSF sells them for more than they purchased them for, they will make a capital gain. If the cryptocurrency is held for less than 12 months, the SMSF is taxable on the full gain. If the SMSF holds the cryptocurrency for 12 months or more, then the CGT discount may apply. If a loss is made, the fund will be able to offset the loss against current year and future capital gains. Capital losses cannot be offset against other income.
General Advice Warning – The information in this article is educational and general in nature. It does not take into consideration your personal financial or taxation information, goals and objectives. Please ensure you seek appropriate financial and taxation advice.