A cryptocurrency is a cryptography secured digital or virtual currency, that makes it nearly impossible to forge or double-spend. These currencies use blockchain technology – a distributed ledger enforced by a disparate network of computers. One distinct feature of cryptocurrencies is that they are generally not issued by any central authority.
While SMSFs are not prohibited from investing in cryptocurrencies, the investment must be allowed for under the fund’s trust deed, must be under the fund’s investment strategy, and comply with SISA and SISR regulatory requirements concerning investment restrictions.
Comply with Regulatory issues
Cryptocurrencies are CGT assets, and SMSFs may obtain, arrange or invest in this type of currency as they would in any other asset. Therefore, SMSF needs to comply with the same regulatory requirements that apply to investments in other assets.
The investment strategy and a fund’s governing rules
An investment strategy is important for any financial decision as it helps figure out the investment objectives and specifies the types of investments SMSF can make. It is advised to always consider the risk factors in the cryptocurrency investment.
Ownership and separation of assets
Keeping your fund’s assets separate from personal assets is important. Therefore, an SMSF’s cryptocurrency investments must be managed separately from the personal or business investments of trustees and members. The SMSF should have clear ownership of the cryptocurrency, and the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF.
Valuation
Valuation under ATO valuation guidelines is necessary for SMSFs. The fair market value will be the value in Australian dollars, which can be acquired from a reputable digital currency exchange or website that publishes its rates publicly. Please note that the value of cryptocurrency changes constantly.
Related-party transactions
SMSFs are usually prohibited from acquiring assets intentionally from related parties. However, there are a few exceptions, including listed securities and business real property. Cryptocurrencies (such as bitcoins) are not ‘listed securities’, hence, they cannot be acquired from a related party.
Sole-purpose test
The sole purpose of an SMSF should be providing retirement benefits to trustees and members, or their family members if a trustee passes away before retirement. When making investment decisions and arrangements, an SMSF will unlikely meet the sole-purpose if trustees or members obtain a financial benefit.
Pension or benefit payments
Where a condition of release is satisfied by a trustee or member, the SMSF can make a lump sum payment by way of transfer of cryptocurrency. However, pension payments are made in cash. They need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets.
Summing up
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