SMSF Series 7 - Investment in Cryptocurrencies (i.e. Bitcoin) through SMSF

In today's world, it's hard to ignore cryptocurrency. Whether it's making headlines, coming up in conversations, or being offered as a payment option, digital currencies like Bitcoin are becoming increasingly mainstream. The recent surge in Bitcoin's value and the ongoing speculation about its future have led many SMSF investors to take a closer look at cryptocurrency as a serious investment option.

One question we often hear is: Can an SMSF invest in cryptocurrency? 

It may seem like an unusual pairing—something as highly regulated as an SMSF investing in something as decentralised and unconventional as cryptocurrency. In this article, we've outlined some key considerations for SMSF trustees looking to include cryptocurrencies like Bitcoin in their portfolios.

Trust Deed and Investment Strategy

Cryptocurrencies are unique compared to traditional investments because they do not generate income. Instead, their value lies in the potential for price appreciation. This speculative nature has led to divided opinions on whether they are suitable for SMSFs. Some argue they are too risky, while others argue that they are similar to gold or precious metals.

Currently the ATO does not view cryptocurrencies as 'currency' or 'foreign currency' because no country officially recognises them as legal tender. They are considered assets for capital gains tax purposes. Therefore, an SMSF's Trust Deed and investment strategy must explicitly allow for investments in 'crypto-assets'.

Sole Purpose Test and Separate Wallet

The sole purpose of an SMSF is to provide retirement benefits to its members or their dependents, if the member passes away before retirement. SMSF trustees considering or holding cryptocurrency must ensure that the investment is solely for the SMSF's benefit and is not mixed with personal assets. Mixing personal and SMSF held cryptocurrencies would breach the sole purpose test, leading to compliance issues. This means that your SMSF must have a separate wallet for trading cryptocurrency (Note: The wallet is an unique encrypted code that enables you to trade cryptocurrency).

Valuation

Under SMSF legislations, all assets must be valued at market value as of June 30 of each financial year. This rule applies to cryptocurrency as well. SMSF trustees should ensure that they have accurate valuations for all crypto assets held by the fund.

Tax Implications

The ATO considers cryptocurrency as an asset for capital gains tax purposes. Selling cryptocurrency at a profit triggers a capital gains tax event, whereas selling at a loss results in a capital loss. It's also important to note that any costs associated with trading cryptocurrencies are not tax-deductible but form part of the cost base of the crypto asset.

If cryptocurrency is sold while SMSF members are in the pension phase, any capital gains made are exempt from tax. However, if the SMSF is in the accumulation phase, normal capital gains tax rules apply.

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

Final Thoughts

Investing in cryptocurrency through an SMSF can be an exciting opportunity, but it's essential to approach it with caution and compliance in mind. The decentralised and speculative nature of digital currencies brings a unique set of challenges that SMSF trustees must carefully navigate.

If you're considering adding cryptocurrency to your SMSF portfolio or need help ensuring compliance with current regulations, contact us today. We're here to help you make informed investment decisions and keep your SMSF on the right track.

Disclaimer

This content is intended as a general guide for GOOD PEOPLE ACCOUNTING SERVICES clients. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, GOOD PEOPLE ACCOUNTING SERVICES disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.