Arguably, an SMSF can invest in cryptocurrencies, such as Bitcoin, but there are several factors to take into account before investing:
- Cryptocurrencies are a high-risk product
- The investment must be in line with the investment strategy of the Fund
- Gains & losses treated same as for other assets of the Fund
- Ensure investment in correct name, and you can confirm ownership, existence & value
High Risk Product
Cryptocurrencies are a high-risk product, because 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.
Is the investment in line with investment strategy?
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.
Gains & Losses
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.
Ownership of Investment
If your fund invests in cryptocurrency, your SMSF auditor will need to confirm the ownership, existence, and value of the cryptocurrency each financial year. You should ensure that the digital wallet for your currency is correctly recorded in the name of your fund or the corporate trustee.