Compliance issues when you invest in bitcoin through SMSF

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With the recent interest and price surge of bitcoin, SMSF auditors have warned SMSF investors about certain compliance traps and potential breaches they should consider. Auditors have not seen plenty of SMSFs investing in the cryptocurrency before so this is relatively new to them as well.

One issue with bitcoin is the ownership. It is difficult to confirm the actual owner of the bitcoin, making it also difficult to separate the assets of the individual and the super fund because of how bitcoin and blockchain ledgers work. The assets are often linked to personal credit cards so it can be risky audit-wise.

To buy bitcoin, investors need a bitcoin wallet, which is a software program offered by various providers. It’s like a bank account but if you invest in bitcoin in an SMSF, the wallet won’t have the SMSF title on it. Bitcoin is pseudonymous while SMSF compliance is about title and ownership.

People can also have several wallets and a new address per transaction so an audit trail can get pretty messy. SMSF investments should be clearly identifiable as being owned by the SMSF and separate from assets held by the trustees in their personal capacity. An individual’s wallet should be separate from a wallet dedicated to the SMSF or else it will be a breach of separation of assets.

Bitcoin can’t be used as an in-specie contribution as well. The SMSF cannot buy bitcoin from its members because it is not a listed security or a commercial property. Bitcoin has to be purchased with cash in the fund from an unrelated party.

It is advisable that SMSF clients update their investment strategy if they want to purchase bitcoin as it is highly volatile based on historical pricing. Bitcoin may not fall into any existing asset class in the investment strategy because it is not cash and does not have a physical form. It is a right and should be added as a separate asset class. SMSF clients should check the trust deed to make sure it doesn’t prevent the trustee investing in bitcoin.

What can you do?

If you would like to know more about SMSF and bitcoin investment, you can click here to know more about Chan & Naylor services. You can leave your details here and we can schedule you for a free consultation. We’ll contact you to explain more.

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