Bitcoin and cryptocurrencies like bitcoin are not money but are capital gains tax (CGT) assets
If an SMSF transacts in cryptocurrencies, SMSF trustees and members need to be aware of the tax consequences.
In each case these will depend on the nature of the SMSF’s circumstances. SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions. There are also super regulatory considerations for SMSF trustees, members and SMSF auditors.
While SMSFs are not prohibited from investing in cryptocurrencies, the investment must:
- be allowed for under the fund’s trust deed
- be in accordance with the fund’s investment strategy
- comply with SISA and SISR regulatory requirements concerning investment restrictions.
The ATO strongly encourages SMSFs to seek independent professional advice before undertaking any new investment in their SMSF, including investments in cryptocurrencies.
Cryptocurrencies, such as bitcoin, are CGT assets and SMSFs may acquire, dispose of or invest in these as they would in any other asset. When an SMSF engages in these transactions it must comply with the same regulatory requirements that apply to investments in other assets.
Investment strategy and a fund’s governing rules
An SMSF’s investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in cryptocurrency, SMSF trustees and members should consider the level of risk of the investment. Trustees and members may then review and if necessary, update their fund’s investment strategy to ensure the investment being considered is permitted.
Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed.
Ownership and separation of assets
The super laws require trustees and members to ensure their fund’s assets are held separately from personal assets. An SMSF’s cryptocurrency investments must be held and managed separately from the personal or business investments of trustees and members. This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF from that used by trustees and members personally.
SMSFs must ensure their investments in cryptocurrency are valued in accordance with ATO valuation guidelines. The value in Australian dollars will be the fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly.
The value of cryptocurrency can change constantly. For the purpose of calculating member balances at 30 June, the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.
With certain exceptions, SMSFs are prohibited from intentionally acquiring assets from related parties. The exceptions include listed securities and business real property, when acquired at market value. Cryptocurrencies such as bitcoin are not ‘listed securities’ so do not fall within the exceptions. They therefore cannot be acquired from a related party.
It follows that SMSF trustees and members – being related parties of the fund – cannot make in specie contributions or other transfers of cryptocurrency to the fund.
An SMSF must be maintained for the sole purpose of providing retirement benefits to trustees and members, or to their dependants if a member or trustee dies before retirement.
It is unlikely that an SMSF will meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements. For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally.
Pension or benefit payments
Where a trustee or member satisfies a condition of release, the SMSF can make an in specie lump sum payment by way of transfer of cryptocurrency. However, pension payments must be made in cash.
Trustees and members will need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as cryptocurrency.
If trustees or members believe they may have breached the super laws, they should work with their professional advisers to rectify the breach as soon as possible. They should also consider making a voluntary disclosure using the SMSF early engagement and voluntary disclosure service.