Cryptocurrency as an investment in a SMSF
An SMSF can invest in crypto and there are many considerations regarding cryptocurrency as an investment in a SMSF.
Investment Strategy and Trust Deed
Firstly, before a SMSF invests in cryptocurrency, this type of investment should be documented in the fund's investment strategy (e.g. risk, liquidity, diversification, etc) and be allowable under the fund's rules (i.e. trust deed).
One of the biggest problems for SMSF trustees who wish to invest in cryptocurrency is getting the account and wallet set up in the fund's name. If this isn't possible, the trustees should consider preparing a separate declaration of trust.
It is our understanding that some exchange platforms want you to open a separate bank account to trade out of, and usually these can't be set up in the fund's name either. A declaration of trust should also be considered for that account.
We suggest seeking legal advice in relation to the preparation of a declaration of trust.
The auditing of transactions and year end balances can be difficult to test, given the lack of transparency and reporting functionality with some providers/exchanges.
Compliance matters to be considered (which may be difficult to test):
- Are there any related party transactions?
- Has financial assistance been given to members or relatives of members of the fund?
- Have contributions been made (and not recorded)?
- Has the fund borrowed money through the platform/exchange
Preferably, all information should be provided (e.g. initial investment confirmations from Exchange). This information is available or can be downloaded from the Bitcoin/Exchange website (or screenshots are provided if information cannot be downloaded). The information/screenshots must be clearly labelled as Bitcoin/Exchange documents with the investor name/bitcoin details included.
Depending on how the crypto currency is stored will determine the year end holding confirmation. There are challenges in this area as some crypto currency will be stored offline. If screenshots/information is unavailable, then a separate declaration would be required; however, this evidence may not be sufficient if the crypto currency represents a significant proportion of the fund's assets. In this case, if there is insufficient evidence the auditor may not provide an audit opinion for the crypto currency.
Another issue for a SMSF investing in cryptocurrency is going to be confirming a valuation at year end.
Obtaining reliable information regarding valuations of cryptocurrency is not easy with some exchanges providing different values. This may improve if financial institutions start servicing this sector, but until then there may be different prices reported with significant volatility in values.
Depending on the amounts involved, the auditor may have to qualify the Audit Report or even raise an Auditor Contravention Report with the ATO depending on what information is received with regards to the value of any cryptocurrency held by the fund.
As you can see from the above there are many factors to consider when it comes to investing in cryptocurrency in a SMSF. We suggest clients seek financial advice to determine if a SMSF is the most suitable structure for them to invest in cryptocurrency.
Information sourced from AFS Audits