Although the ATO does not have any formal rulings around this type of investment as yet, it does not view Bitcoin or other crypto assets as currency. At present, they class these as assets for capital gains tax purposes.
This means that if you purchase Bitcoin with your SMSF and hold onto them for at least 12 months you’ll only be charged 10% capital gains tax if you then decide to sell them. If however, your SMSF retains the Bitcoin until it’s fund members reach retirement, there will be no tax applied to the capital gain.
So What Are Bitcoin And Other Cryto Currencies?
If you have no clue as to what Bitcoin or crypto currencies actually are, then you’re most likely not alone. You see, Bitcoin and crypto assets were first created in 2009 and are intangibles. They are created as a reward for ‘mining’ using computer processing power.
They do not generate income but are generally purchased for their capital appreciation, much like you would purchase bars of gold, coins, bank notes or even pieces of artwork.
They started in 2009 with a value of US$1 and are currently valued at US$10689.99.Source: Google
Here’s another chart showing their growth in the past 9 years:Source: https://charts.bitcoin.com/chart/price
As you can see, they’ve risen in value quite dramatically in the past 6 months or so but appear to be stabilising a little. Obviously, there’s no guarantee of whether they will rise again or if their value will crash. As an investment, they are quite volatile and certainly not for the feint hearted.
A Simple Explanation Of The Process Of Buying Bitcoin
Bitcoin are purchased and sold online using a virtual ‘wallet’. You simply deposit cash into the wallet and it gets converted into Bitcoin or other crypto currencies of your preference.
This virtual wallet has a collection of electronic keys which unlock bitcoin addresses around the world to enable transactions to be made. These transactions occur between the connected addresses and every 10 minutes, all transactions are time stamped and published as a block. This is commonly referred to as a blockchain.
Put more simply, you can liken this to the ISP addresses which all link to each other across the internet and allow us to make purchases online, send emails and generally connect with others in virtually any corner of the world.
The resultant Bitcoin or blockchain ledger shows bitcoin movements and balances similar to a normal bank account statement.
Your purchased Bitcoin can either be kept in the online ‘virtual’ wallet or transferred to an offline wallet which is commonly referred to as a cold storage device. The online wallet has two keys. The public key is similar to a bank account number and the private key is the password necessary to access the wallet.
Ensuring that your wallet is secure is vitally important because these can be hacked and you could end up losing all of your investment. For this reason SMSFs must hold their crypto currency in a hard wallet to comply with the stringent super laws. This can, of course, not be accessed by any of the trust members.
So How Can You Purchase Bitcoin With Your SMSF?
First and foremost you need to ensure that this type of investment is included in both the trust deed and your trust’s investment strategy.
Next you need to be very vigilant to ensure that the purchase of Bitcoin meets the conditions of the sole purpose test. The trust cannot purchase Bitcoin from any of its members and the members cannot transfer Bitcoin into the trust from their own accounts.
Any movement of Bitcoin within the trust (buying or selling) must be conducted by the trust administrator and not the fund members. This is vitally important as the Bitcoin may be held securely in a public IP address.
Contravening the sole purpose test could include a trust member personally establishing an account and then signing up as an affiliate for that account. If the trust member then sets up the SMSF’s Bitcoin account using the affiliate referral link, the member would receive affiliate commissions and this would breach the conditions of the sole purpose test.https://www.flickr.com/photos/btckeychain/
How To Stay Compliant When Setting Up A Bitcoin Account For Your SMSF
In order to remain compliant with current super laws, the Bitcoin account must be set up in the name of the SMSF with a reliable coin exchange. Here are some steps to take to ensure that only the SMSF is trading in Bitcoin in this account:
- Create a unique email address for the SMSF only and use this to register the coin exchange account.
- Never be tempted to transfer any Bitcoin between a member’s personal account and the SMSF account or vice versa.
- Open a separate bank account in the name of the SMSF which will be solely used for funding the cryto currency trades.
- Complete a Declaration of Trust document for your trust’s auditor stating that the Bitcoin are held by the trustee on behalf of the SMSF and are not used personally.
- Make sure to save all the transaction reports and invoices and make them available to the SMSF administrator as well as the auditor.
- Ensure that you obtain a report as at the 30th of June every year which has your wallet balance to help with the fund’s tax return obligations.
When looking for a reliable and trustworthy coin exchange to set up your SMSF account with, you should ensure:
- The exchange is based in Australia with a physical office location
- Make sure you check how long they’ve been operation and who actually owns the exchange
- Also make sure that the exchange complies with all anti money laundering regulations
- The exchange should also be a member of an industry body which is self-regulating such as the Australia Digital Commerce Association
- Ensure that the exchange provides strong customer support via phone and online
- And finally, ensure that their trading fees are fair and reasonable
As a final word, although you might be keen to diversify some of your superannuation investments into the purchase of Bitcoin, if you are nearing retirement age this might not be a wise decision due to the volatile nature of the investment.