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PKF Australia

Accountants and Business Advisers

Bitcoin: What is it and can an SMSF invest in it?

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David Henriksen

Partner

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Bitcoin: What is it and can an SMSF invest in it?

Bitcoin is said to have been invented by an unknown person or group of people under the name Satoshi Nakamoto and released in 2009 as an open-source software working on the blockchain basis.

Bitcoin is one of many digital currencies (cryptocurrencies) and is one of the most publicised cryptocurrencies at this point in time. It is operated without any central bank or single administrator and is a peer-to-peer network in which transactions can take place between users directly.

It is noted however, due to the rise in its popularity there are many intermediary transaction providers as well, who facilitate trades to allow the currency to be more readily traded.

The value of Bitcoin is affected by the global populations acceptance of it as a store of value and its price is affected by the supply and demand on the currency. In the past few months it has seen a significant rise in value and also a significant drop in value as governments around the world look to block or regulate its use in their respective countries. This is due to their inability to control or trace the wealth that is transacted through it. 

Transactions between Bitcoin owners are recorded in a public distributed ledger called blockchain and are verified by network nodes through the use of cryptography.

Blockchain works on the concept that each node (a computer connected to the network) gets a copy of the ledger of transactions. The nodes then cross check the ledgers they each have automatically, and data is verified on the basis of what the nodes all agree back to. If one node (computer) is corrupted or manipulated to show a different Bitcoin holding to that of the public ledger the error would not be accepted by the wider group of ledgers and overridden to match the wider groups ledgers. This results in the community of ledgers not being able to be controlled or manipulated by one source or one governing body.

Bitcoin is stored in a ‘wallet’ which is a place that has a record of the private key that allows you to access your Bitcoin address (which is your public key) and usually it also provides a visual representation of the number of Bitcoins you hold. There are many types of wallet options but in simple terms you can have a wallet on an electronic device such as a computer or mobile phone (via an App) which both are usually connected to the internet and are more vulnerable to hackers. Alternatively, a hardware wallet can be used in which the wallet is a small device that is connected to the web to enact bitcoin transactions and then taken off line again. Hardware wallets need to be kept safe because if lost, stolen or damaged the Bitcoins that belong to the private key on the wallet could be lost permanently.

Cryptocurrency is not specifically disallowed as an investment in a Self-Managed Superannuation Fund (SMSF). If it is to be included as an investment in an SMSF there are many rules to contend with to not breach the superannuation laws (Superannuation Industry (Supervision) Act (SIS Act)).

It must be noted that due to the volatility of the Bitcoin and cryptocurrencies market this type of investment should be viewed as a speculative high-risk investment and not a place to store wealth that cannot afford to be lost or significantly fluctuate in value.

Specifically, an SMSF investor in Bitcoin or other cryptocurrencies needs to consider the following:

  • The ‘sole purpose test’ under the SIS Act
  • Separation of Bitcoin investments from other non SMSF Bitcoin holdings
  • SMSF investment strategy covering off on the investment decision to invest in Bitcoin
  • Restrictions on who SMSFs buy Bitcoin from as they cannot be bought from related parties of the SMSF
  • SMSF deed restrictions on what types of investments an SMSF may hold
  • Annual valuation requirements of assets in SMSFs at market value

The types of documents an SMSF auditor would expect to sight to evidence compliance by an SMSF of the SIS Act would include:

  • The SMSF investment strategy
  • Evidence of Bitcoin Wallet owner such as SMSF minutes/resolutions and statutory declarations by SMSF trustee
  • Bitcoin buy and sell statements supplied by the relevant sellers/buyers or third-party transaction facilitators
  • Bitcoin holding and transaction summary statement supplied by third party transaction facilitators
  • Annual market value details

The SMSF auditor needs to be satisfied that the evidence they sight supports the following:

  • Annual SMSF Bitcoin holdings
  • Annual SMSF Bitcoin market value
  • SMSF non-related party trading restrictions have been adhered to
  • SMSF arm’s length transaction requirements have been adhered to
  • Separation of the SMSF Bitcoin holdings from other assets they hold personally or in other entities
  • Adherence to the SMSF investment strategy as formulated by the SMSF trustee
  • Adherence to any restrictions imposed through the SMSF Deed on investments held by the SMSF

The ATO has started to take an interest in Bitcoin and cryptocurrencies announcing they will look to review compliance of the SIS Act in SMSFs investing in these types of assets. Having heard of and seen SMSF trustees investing in Bitcoin and cryptocurrencies in ways that do not adhere to the rules covered in this article this could become a real problem for many SMSF investors.

SMSFs who trade in Bitcoin would ordinarily, based on the publicised ATO tax treatment of Bitcoin be taxed on the gains or losses they make on a capital gains tax basis. Further details on this can be obtained on the ATO’s website, and each SMSF trustee should seek advice from their tax agent on the most appropriate tax treatment for their SMSFs Bitcoin profits or losses based on their SMSFs circumstances.

Bitcoin and cryptocurrency may be an allowed investment in an SMSF but it must be stressed that it is a high-risk asset and due to this should be carefully considered against alternative investments before risking retirement wealth in this investment class.

If you have more questions after reading this article or have an SMSF with Bitcoin or cryptocurrency investments and want to talk further please contact PKF Sydney & Newcastle on (02) 4962 2688 or email [email protected] and one of the team will contact you to assist.


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