The Google Security Blog reported that malware is a growing issue. A Google study showed that a single malware source has infected over 60,000 hosts. The chart below shows the number of infected sites over time from the top ten malware sites.
Why is this a SEO issue? Well, it might not hurt your rankings but it will 100% hurt your traffic from Google and traffic in general. Google labels malware sites with a big warning on the Google search results. It looks like this:
Trust me, you don't want malware on your site and you don't want that malware warning.
Forum discussion at Google Webmaster Help.