What you need to know before you buy a bitcoin in your SMSF

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The surge in Bitcoin price has attracted many SMSF investors, but SMSF auditors and accountants need to know the finer details regarding compliance. It’s best to consult an investment consultant before jumping on the bandwagon.

Bitcoin is a peer-to-peer payment system that allows online payments to be transferred directly without an intermediary. All users have an identical updated version of a spreadsheet called blockchain, containing all transactions made in digital currency.

The blockchain technology offers incorruptible and irreversible transactions, which are grouped and added to the public ledger in blocks that cannot be controlled by a single entity. Note that Bitcoin is pseudonymous ever since it started in 2008.

To buy a Bitcoin, you need a Bitcoin wallet to act as your bank account. It stores and manages both your public key and your private key. The public key receives the money while the private key spends the money. When you invest in Bitcoin in an SMSF, the wallet will not have the SMSF title on it and it is a compliance challenge.

The wallet can show the trustee’s name but it is not recommended to have private keys stored online because access to it gives complete control over the stored Bitcoin. While the blockchain technology is robust, private keys and passwords remain vulnerable. An individual can also have multiple wallets and it can be difficult for auditors to track.

SMSF investments have to be clearly identified as being owned by the SMSF and a Bitcoin wallet should be separate from his SMSF wallet clearly made in his personal capacity, otherwise there may be a breach of separation of assets. SMSF also can’t buy Bitcoin from it members because it is not a listed security or a commercial property. Bitcoin has to be purchased in cash from an unrelated party.

An investment consultant can help you work on your investment strategy, which is required in a SMSF but Bitcoin is highly volatile based on its previous pricing and it may not be apt to be included in the fund investment strategy. Bitcoin may not fall under any existing asset class because it does not have a physical form as well.

Cryptocurrency may be considered to be a separate asset class and it’s best to check if the fund trust deed allows or disallows Bitcoin investment. However, auditors can access the blockchain through websites that allow input of an address or transaction ID to get detailed data of a transaction.

If the SMSF is not on title, the trustees have to acknowledge the trust over the Bitcoin. They have to declare that they can recover the asset and that the wallet, private keys and passwords are secure. When the holding is not substantial, these may be enough proof along with a wallet balance screenshot, otherwise ownership should be verified.

The member must prove that the super fund owns the address through message signing – a function that can be found in some wallets. Many people buy Bitcoin without talking to an investment consultant and they may make mistakes because of it. According to ATO, Bitcoin is not a medium of exchange nor is it an Australian or foreign currency. Bitcoin in fact is a CGT asset.

If you would like to know more about SMSF and Bitcoin investments, 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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