What is cryptocurrency?
Bitcoin is a type cryptocurrency. It does not exist in physical form (as in coins or notes) but it has the same characteristics as traditional money. It can be used to purchase goods and services online. Unlike traditional currencies it doesn’t have political or geographical borders and transactions can take place to and from anywhere in the world. Bitcoin is a decentralised digital currency meaning that it works without a central bank or central administrator. Transactions occur between users directly, without the involvement of a third party.
Cryptocurrencies and your SMSF
Rather than using bitcoin as a means of purchasing goods and services, many people are purchasing bitcoin as an investment, especially following its early price surge. This has made cryptocurrency an attractive option for SMSF trustees.
Many people find the fact that bitcoin operates in an unregulated market a huge attraction. Self Managed Super Funds operate in a highly regulated space so there are many key areas that need to be considered if you wish to hold cryptocurrency in an SMSF.
Trust Deed & Investment Strategy
The trust deed of the fund should allow for the investment in cryptocurrency and the investment strategy should also reflect this.
The Australian Tax Office does not recognise cryptocurrencies as legitimate currency given that it is not officially recognised by any country as legal tender. Rather, it is considered an asset for capital gains tax purposes. Therefore, the above-mentioned documents would need to allow for ‘crypto-assets’.
Crypto assets don’t generate income. The investment is made purely on the expectation that it will appreciate it value. Some argue this makes it an inappropriate SMSF investment. However, the same argument can be made of gold and other traditional stores of value.
Sole Purpose Test
The super fund must always be maintained for the sole purpose of providing retirement benefits to its members, or to their dependents if the member dies before retirement. Thus, it is very important that the purchase and holding of cryptocurrency by the SMSF is not intertwined with personal assets, nor should the trustees derive any personal benefit from the investment or transaction relating to the investment. This would breach the sole purpose test.
Identification and Ownership
As with all SMSF assets, the bitcoin must be clearly identified as belonging to the self-managed super fund and not be ‘mixed up’ with personal assets. To trade cryptocurrency, you must have a unique encrypted code, otherwise known as a wallet. It is the ‘address’ from which things can be sent to and from. The SMSF needs its own wallet, separate to any that you may have in your own name for personal cryptocurrency investing. A wallet is only identifiable via an IP address, making it difficult for the fund to have the asset registered in any name at all. For this reason, the trustees must ensure the following can be clearly identified by the auditors of the SMSF:
- Trading history for the wallet at the IP address. This will need to match up exactly with the transactions from the bank account of the fund (it is recommended that a separate bank account be opened by the SMSF just for its cryptocurrency trading). It may be a reportable breach should the auditor identify personally owned and SMSF assets mixed in the same account.
- Given the wallet cannot explicitly show that it is held for the SMSF only, a deed of trust or equivalent document confirming that the fund is the beneficial owner of the cryptocurrency is required.
All assets of a super fund must be valued at market value. Thus, the value of any cryptocurrency held by an SMSF will be adjusted to reflect the market value as at 30 June of the relevant financial year.
Tax consequences of investing in cryptocurrency.
As earlier mentioned, the tax office considers bitcoin and other cryptocurrencies as an asset for capital gains purposes. If bitcoin is sold for a profit, this will trigger a capital gains tax event and attract capital gains tax. Similarly, if sold for a loss, a capital loss is created. Any costs involved in trading cryptocurrencies cannot be claimed as a deduction. They will instead form part of the cost base of the crypto asset. If the bitcoin is sold and creates a capital gain while the members of the fund are all in pension phase, the gain will be exempt from any tax consequences.
Kimberlee Brown is the Director of SMSF at H&R Block.
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