Virtual Currency (Cryptocurrency) is a type of unregulated, digital money in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Bitcoin is one of the most popular virtual currencies and it has increased in value rapidly in recent years.
So far, there are not yet any formal rulings or publications from the ATO clarifying how the rules apply to virtual currency investments in the SMSF. We note there are a number of issues the Trustees of an SMSF need to consider before investing in virtual currencies.
Trust Deed and Investment Strategy
The Trustees of an SMSF need to review the SMSF Trust Deed and Investment Strategy to ensure that virtual currency is an allowable investment of the Fund. The Trust Deed that we provide to our clients does not prohibit an SMSF from investing in virtual currencies. The Investment Strategy template that we provide specifically allows for investments in virtual currencies.
Ownership and Valuation
The Trustees of an SMSF need to ensure that the Fund has legal ownership over its assets. When registering a virtual currency wallet with the currency provider, Trustees need to ensure that the wallet is under the name of the SMSF.
Like all assets in the Fund, virtual currencies must be disclosed at market value at year end on the SMSF Financial Statements and Tax Return. The unrealised gains or losses will not be taxed as virtual currency is treated as a CGT asset.
The Tax Office has issued several practical guidelines regarding the taxation treatment of virtual currency. An SMSF that is investing in virtual currencies may be subjected to capital gains tax rules when Trustees dispose of the virtual currencies as virtual currencies receives similar tax treatment as shares.
Although virtual currencies may be of similar nature as foreign currency, the Tax Office Determination (TD 2014/25) notes that virtual currency is considered to be foreign currency for the purposes of Division 775 of the Income Tax Assessment Act 1997. For more details, we’ve included the ATO guidelines here for your reference:
For more information on investments in Bitcoin using an SMSF, please see our Bitcoin page here.