Arguably, an SMSF can invest in cryptocurrencies but there are several factors to take into account before investing.
Cryptocurrencies are a high-risk product as they are blockchain driven and unregulated.
While there have been numerous stories in the media about massive gains made on the currency by early investors, the price fluctuates, cryptocurrencies face new competitors, and “hard forks” occur – where the blockchain is split and forms a permanent divergence from the original. Bitcoin, for example, has broken into Bitcoin, Bitcoin Cash and now Bitcoin Gold. The danger is that you end up on the wrong fork. There is also the danger of hacker’s breaching your fund’s digital wallet and stealing your investment.
Trustees of the fund need to ensure that any investment in cryptocurrency is in line with the investment strategy of the fund, the Trust Deed allows for it at the time the investment is made, and it is an appropriate investment. In particular, the sole purpose test in the Superannuation Industry (Supervision) Act 1993 requires that the fund is maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Trustees need to ensure that the risk associated to these currencies is in the best interests of the fund. A minute documenting the decision to invest in the cryptocurrency would be beneficial.
For tax purposes, gains and losses in the fund are treated in the same way as other assets in the fund.
That is, CGT may apply to any gains made on the sale or exchange of the currency.
If your fund invests in cryptocurrency, there are a few practical issues. Your SMSF auditor needs to confirm the ownership, existence, and value of the cryptocurrency. As a result, the digital wallet for your currency should be in the name of your fund or the corporate trustee. You need to ensure that your personal assets, and the assets of your fund, are kept separate at all times. Once money is deposited into your fund, it may not simply be a case of being able to withdraw these amounts, and they may be ‘stuck’ in the fund until a condition of release is met, which usually means attaining retirement age. And, you need to be able to trace your transactions to identify trades, the value of the trade, and the time and date they occurred.
Documentation to keep the ATO happy
If you are using cryptocurrencies for whatever purpose, it’s important to keep records of the transactions to ensure that if the ATO challenges your tax treatment of the currency, you can prove your position.