Every day we get to hear stories of bitcoin and these other cryptocurrencies. Suddenly, they have become the headline of every global financial news as gold used to be when investors often rely on it in times of economic and political turmoil. It seems Bitcoin is gradually taking over that space even though only a few have convincing information about this rave of the moment hence It’s important we find answers to the persisting mind-boggling questions: Why is all this fuss about bitcoin? What is it all about exactly?
Bitcoin is a relatively young technology as it was developed by an “anonymous” Satoshi Nakamoto in 2009. It is a digital currency, that was created by solving mathematical problems and kept in a bitcoin wallet electronically just like other cryptocurrencies such as Litecoin, Monero, Ethereum, and Ripple. New bitcoins are created at a fixed rate by “miners” who obtain them for processing transactions and then sustain the process effectively as a result of their proficiency in IT. It is said that once 21 million bitcoins have been created, there will be no new mining and its price, which has benefitted immensely from the speculations about it recently is and will be determined by demands and supply.
The usual currency we are used to have a central body in charge of its production and distribution such as the “central banks” and other various regulatory organizations but Bitcoin is decentralized. This even makes it more confusing as there’s no Bitcoin Inc in charge of the Bitcoin network. Rather all that is required to trade in cryptocurrency is; one or two cryptocurrency wallet and one or two cryptocurrency exchange to trade on. it’s simply a peer-to-peer network which maintains a shared transaction ledger called the blockchain.
Only 7 years ago, May 2010 precisely, 10,000 bitcoins were used to buy just two pizzas. By the start of 2017, one bitcoin was worth A$1354. Fast forward to November 2017, it hit a record high of A$9710, which bring the value of those two pizza ordered in 2010 to be A$97 million right now. In that same November, cryptocurrency market capitalization surpassed US$200 billion.
Just like the dollar is the default currency in global trade, Bitcoin is fast becoming the reserve currency of a broader cryptocurrency economy. It possesses more refined currency exchange services and deeper market compared to the other cryptocurrencies. So the more people aim to buy the other less known cryptocurrencies, they first trade their dollar for Bitcoin before swapping for the others which only make Bitcoin grow in value.
Bitcoin, which has similar or even superior advantages could essentially become a stock of value much like gold. Millions of dollars’ worth of bitcoins are stored electronically and recorded on a piece of paper so far the encryption keys are well protected, it takes up no real space and more so it can’t be seized by any government.
As announced recently, the Bitcoin Investment Trust Shares have increased 10-fold in value in just the last twelve months. It has also gained more than 80 percent in the last three months alone. As beautiful as this may sound, it’s imperative we emphasize that investing in bitcoin is risky. As fast as it gathers value, it has also been known to lose 80 percent of its value in a matter of days. It’s much like a roller-coaster, it changes daily. There is no assurance that it will recover from its next crash just like it has recovered from the previous crashes [at least you have been told that no company regulates it]. Hence it’s only expedient that you err on the side of caution and invest an amount you can afford to lose.
At Easy Super, we often receive a lot of questions about bitcoin in Self-Managed Super Funds and if it is possible to invest in cryptocurrencies using your super money.
So, can SMSF invest in bitcoin and other cryptocurrencies? The ATO view is that there is nothing in the law which explicitly prohibits an SMSF from investing in crypto-currencies if the investment complies with all other requirements under the law.
The most obvious investment restrictions are that the investment has to be allowed by the SMSF’s trust deed, must be in line with the investment strategy of SMSF and has to satisfy the sole purpose test (s62 of SISR). The sole purpose test requires that the fund is maintained solely for one or more core purposes or one or more core purposes and one or more ancillary purposes.
Bitcoin may not be categorized into any existing asset class, it’s no cash and doesn’t have a physical form which makes it hard to be classified as a collectable as well in the investment strategy. It is only important that the trustees of a SMSF consider the risk of the investment and ensure investment decisions are made in accordance with the fund’s documented investment strategy. Thus, the trustees of the SMSF might need to update the trust deed and formulate their investment strategy to include the cryptocurrencies.
Investing in bitcoin presents some compliance challenges for an SMSF and one is that the SMSF investments must be under SMSF’s name. Trustees must also ensure that the fund’s ownership of its assets (or investments) is secure, under regulation 4.09A of the SISR. It follows that to comply with this covenant, assets of the fund need to be recorded in a way that clearly distinguishes them from the trustees’ personal or business assets, and evidences the super fund’s legal ownership. It might be a challenge to open a wallet which will allow SMSF to be a cryptocurrency’s buyer and a holder, only a few wallets will allow to do it.
Cryptocurrencies cannot be acquired from a related party. Taxation Determination TD 2014/26 provides the ATO’s view that bitcoin is a capital gains tax (CGT) asset. It does not meet the definition of money or currency.
When trading a cryptocurrency, any income and losses resulting from trading is accounted for on the capital account, rather than on the revenue account because section 70-10(2) of the Income Tax Assessment Act 1997 excludes assets such as shares, units in a unit trust and land held by a superannuation fund from being trading stock. This exclusion is likely to apply to trading in crypto-currencies. Therefore, if an SMSF is trading crypto-currencies, it will need to report any income or losses as capital gains and capital losses.
If you are interested to find out more about Self Managed Super Funds and what type of investments you can undertake in SMSF, please contact our team on 1800 327 978.