The USA’s Securities Exchange Commission (SEC) approved eleven Spot Bitcoin ETFs on 10 January 2024. But , So, anyone can buy and sell these ETF units. However, unlike usual ETFs, there are slight changes regarding the distribution of benefits/profits by the Funds to the investors. This post will explore and explain the newly approved Spot Bitcoin ETFs from the taxation point of view.
Table of Contents
What are Spot Bitcoin ETFs?
The purpose of Spot Bitcoin Exchange Traded Funds (ETFs) is to mirror the price of bitcoins in the crypto market. So, they invest in real Bitcoins purchased through other holders or an authorized cryptocurrency exchange and hold them in authorized and managed digital wallets. Since it holds Bitcoin directly, the value of the ETF is closely tied to the real-time price movements of Bitcoin.
When you invest in the ETFs listed by these Bitcoin-owning ETFs (Spot Bitcoin ETFs) , the firm that manages these funds issues shares of its holdings in the form of ETF units. Thus, even though you buy financial units (ETFs) on a stock exchange, you are indirectly investing in the underlying asset, Bitcoin.
This is so because these approved Spot Bitcoin ETFs are not allowed to have one specific type of redemption, i.e., in-kind redemption. They are permitted cash-only redemption, which means when you sell on an exchange, you get a Dollar bill and not the actual Bitcoin equal to the redemption value.
List of 11 Spot Bitcoins Approved by SEC on 10Th January 2024
The Securities Exchange Commission (SEC) has approved the following list of spot Bitcoin ETFs
- ARK 21Shares Bitcoin ETF (NYSE:ARKB)
- Bitwise Bitcoin ETF (NYSE:BITB)
- Blackrock’s iShares Bitcoin Trust (NASDAQ:IBIT)
- Franklin Bitcoin ETF (NYSE:EZBC)
- Fidelity Wise Origin Bitcoin Trust (NYSE:FBTC)
- Grayscale Bitcoin Trust (NYSE:GBTC)
- Hashdex Bitcoin ETF (NYSEARCA:DEFI)
- Invesco Galaxy Bitcoin ETF (NYSE:BTCO)
- VanEck Bitcoin Trust (NYSE:HODL)
- Valkyrie Bitcoin Fund (NASDAQ:BRRR)
- WisdomTree Bitcoin Fund (NYSE:BTCW)
What are Bitcoin ETFs?
Often, when people refer to a “Bitcoin ETF” without the “spot” qualifier, they are referring to a fund that invests in Bitcoin futures contracts rather than directly holding Bitcoin. These ETFs track the price of Bitcoin futures traded on commodities exchanges. So, their underlying asset is not the actual Bitcoins .
Spot BitCoin ETFs vs Bitcoin ETFs
Here’s a comparison between Spot Bitcoin ETFs and Bitcoin ETFs (often futures-based) in a tabular format:
|Spot Bitcoin ETF
|Bitcoin ETF (Futures-Based)
|Directly holds Bitcoin.
|Invests in Bitcoin futures contracts, not actual Bitcoin.
|Tracks the current (“spot”) price of Bitcoin.
|Tracks the price of Bitcoin futures, which may differ from the current Bitcoin price.
|Faces more regulatory hurdles, less common.
|More commonly approved by regulators like the SEC in the U.S.
|Provides direct exposure to the actual price of Bitcoin.
|Provides exposure to the performance of Bitcoin futures, which can be influenced by market sentiment, contango, and backwardation.
|Suitable for investors looking for direct exposure to Bitcoin’s market price.
|Suitable for investors seeking exposure to Bitcoin’s price movements through a regulated futures market.
|Storage and Security
|No need for investors to deal with Bitcoin storage and security.
|No direct interaction with actual Bitcoin, as it deals with futures contracts.
|Potential Price Discrepancy
|Less likely to have a discrepancy between ETF value and Bitcoin market price.
|Futures prices can deviate from the current Bitcoin price, leading to potential discrepancies.
|Liquidity and Trading
|Dependent on the liquidity and trading volume of the underlying Bitcoin market.
|Relies on the liquidity and depth of the Bitcoin futures market.
Taxation of Income from Spot Bitcoin ETFs
An ETF can give income in various forms. It can provide you with Interest , Dividends or share the profits on selling of assets it holds. But most of the time , you can earn (or lose) on the buying and selling of ETFs like any mutual fund units.
(i) Buying & Selling of ETFs
The first rule of taxation of Spot Bitcoin ETF is that nothing related to cryptocurrency applies here. Every rule of computing capital gains that applies to mutual fund units or shares also applies to the purchase and sale of Spot Bitcoin ETFs. If you invest, capital gains or losses may arise, whether short-term or long-term, depending on the Spot BitCoin ETF units’ holding period.
For example, say Richard bought 100 units of Bitwise Bitcoin ETF Trust (BITB ) on 11 January 2024 at $20.00 and sold the same after one year at $ 40. He earns Long-term Capital gains (LTCG) of $20( 40-20). The LTCG is taxed at a long-term capital gains rate applicable to the year the sale was made .
Please also note that IRC Section 1091 prevents adjustment of losses incurred on selling ETF shares at a loss and then repurchase similar shares within 30 days. The wash sale rule prevents the recognition of a capital loss in such situations.
(ii) Dividend by ETFs
Like stocks, ETFs that pay dividends or interest to investors are taxed at the individual’s income tax rate. For example, if you receive $100 in dividends from an ETF, this amount is added to your taxable income for the year.
(iii) In- Kind Redemption
Many ETFs, especially those that track indexes, is the ability to use in-kind redemptions. This allows the ETF to avoid selling securities to meet redemptions, which can reduce capital gains distributions. But , Spot Bitcoin ETFs are NOT allowed for in-kind redemption. It means that when you asked for redemptions , they have to settle in dollars only and they can can give you equal value Bitcoins.
(iv) Capital Gains Distribution by Spot BitCoin ETFs
If the Spot Bitcoin ETFs shares with you the proceeds from the fund’s sales of Bitcoins from within its portfolio, It is the investor’s pro-rata share of the proceeds from the fund’s transactions and taxable in your hand as long term capital gains.
In the current avatar , the taxation rule that applies to general ETFs are also applicable to Spot Bitcoin ETF or Bitcoin ETF. No difference !
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