Author: TaxDAO
Exchange Traded Funds (ETFs) are similar to stocks. They are traded on the stock exchange and can be traded at any time throughout the day. Buy and sell at market prices that fluctuate due to supply and demand conditions. These funds typically hold a variety of assets, such as stocks, commodities or cryptocurrencies, and aim to track the performance of a specific index or asset. Compared with mutual funds, the net asset value of ETFs is calculated multiple times during the trading day, allowing investors to trade fund shares at a price close to the market price of the underlying assets, with greater liquidity and flexibility.
With the US SEC’s approval of Bitcoin spot ETF, its tax treatment has also become a focus of investors’ attention. This article will start from the definition of Bitcoin ETF and focus on the tax treatment that may be involved by investors in the United States, Hong Kong and Singapore investing in US Bitcoin ETFs.
1. Definition of Bitcoin ETF
1.1 Bitcoin ETF
Bitcoin ETF holds Having Bitcoin, or contracts related to the price of Bitcoin, traded on traditional stock exchanges allows investors to gain exposure to Bitcoin price fluctuations without directly holding or managing Bitcoin, thereby eliminating security and digital wallet concerns.
In the ever-changing world of cryptocurrency investment, Bitcoin ETFs have become an important financial tool. There are two main types of Bitcoin ETFs: Bitcoin spot ETFs and Bitcoin futures ETFs. These two Bitcoin ETFs meet different investment strategies and risk preferences.
1.2 Bitcoin Spot ETF
Bitcoin Spot ETF is an exchange-traded fund that directly holds Bitcoin as the underlying asset, which means that the spot ETF Performance is directly tied to the real-time value of Bitcoin held. When investors buy shares in a spot ETF, they are essentially buying Bitcoin, they just don’t personally hold the Bitcoin themselves.
1.3 Bitcoin Futures ETF
Bitcoin Futures ETF is an exchange-traded fund that does not directly hold Bitcoin and invests in Bitcoin futures Contracts, investors can speculate on the future price fluctuations of Bitcoin without directly holding Bitcoin or futures contracts. Financial institutions purchase Bitcoin futures contracts and track the future price of Bitcoin by issuing stocks, raising funds, and establishing Bitcoin futures ETFs. When investors buy Bitcoin futures ETF stocks, they are buying a portion of the fund that owns these contracts, indirectly betting on the future price of Bitcoin.
1.4 Comparing Bitcoin spot ETFs and futures ETFs
The main differences between Bitcoin spot ETFs and Bitcoin futures ETFs include underlying assets, factors affecting performance, Liquidity needs, potential price differentials and exposures and risks.
① The difference in underlying assets is that the Bitcoin spot ETF directly holds Bitcoin, while the value of the Bitcoin futures ETF comes from futures contracts related to Bitcoin.
② The difference in factors affecting performance is reflected in the fact that Bitcoin spot ETFs are linked to the real-time price of Bitcoin, while Bitcoin futures ETFs are affected by the contract market.
③ From the perspective of liquidity demand, because Bitcoin spot ETF needs to hold and safely store Bitcoin, it will not trade frequently to ensure that the ETF price is consistent with the Bitcoin spot price, while Bitcoin futures ETF transactions are more frequent, the liquidity management process is more complex, and contracts may be rolled over when they expire.
④ There are potential price differences between the two types of Bitcoin ETFs because Bitcoin spot ETFs usually closely track the spot price of Bitcoin, while Bitcoin futures ETFs are affected by contract market dynamics and contract expiration dates.
⑤ From the perspective of exposure and risk, the exposure of Bitcoin spot ETF is direct exposure to Bitcoin price fluctuations. The risk is mainly related to the price fluctuation of Bitcoin, while the exposure of Bitcoin futures ETF is Indirect exposure to Bitcoin price and risk, affected by Bitcoin volatility and contract market complexities such as leverage and expiration dates.
2. Possible taxes involved in investing in ETFs
The operation of ETFs mainly involves several major links: share creation, redemption, and investor recovery (obtained Dividends, income from price differences in market transactions).
2.1 Create Redemption Link
The "Create Redemption" mechanism is the way for ETFs to obtain market exposure and is also the key to the operation of ETFs. Unlike mutual fund shares, retail investors can only buy and sell ETF shares in market transactions. Therefore, ETFs do not sell individual shares directly to retail investors, nor do they redeem individual shares directly from retail investors, but instead turn to authorized participants (APs). AP can be a market maker, expert or any other large financial institution.
ETF share creation means that when the ETF stock price is higher than its net asset value and the ETF company wants to add new shares to its fund, it turns to AP for help. In order to purchase shares from an ETF, AP aggregates and deposits a designated basket of securities and cash in the fund in exchange for ETF shares in a physical transaction, thereby circumventing the sale and avoiding capital gains taxes.
ETF redemption means that when the ETF’s stock price is lower than the net asset value, the redemption process is opposite to the creation process. AP purchases a large number of ETF shares on the open market and delivers those shares to the fund. In return, the AP receives a predefined basket of personal securities or cash equivalents, and the redemption is also an in-kind exchange, thus avoiding capital gains tax.
However, once AP receives ETF shares in Creation, it can freely sell ETF shares to individual investors, institutions or market makers in the ETF in the secondary market to realize the price difference per share. At this time, it should If a tax event occurs, capital gains tax or income tax must be paid.
2.2 Investors’ recovery of returns
The stock dividends and bonus income received by investors from the fund must pay personal income tax at a certain rate according to regulations.
In addition, investors can buy and sell ETF shares at market prices in market transactions. When investors obtain income through the price difference, they need to pay capital gains tax based on the selling price minus the buying price. When foreign investors purchase domestic ETFs and receive interest dividends, withholding tax will be involved. Withholding tax is a type of income tax levied at the source by a country's government. This tax is mainly levied when non-residents receive stock dividends and bond interest. For example, there is no withholding tax when Americans living in the United States purchase U.S. ETFs, while Singapore residents investing in U.S. ETFs may involve withholding tax.
3. Tax treatment of U.S. residents investing in U.S. Bitcoin ETFs
The taxation of Bitcoin ETFs at the lower level is roughly the same as other ETFs, involving capital gains Tax, income tax, withholding tax. In the sale and redemption of ETFs, the sale is a capital gains tax event; while the redemption is not a taxable event and does not require tax.
3.1 Tax treatment of futures Bitcoin ETFs invested by U.S. tax residents
The tax treatment of futures Bitcoin ETFs depends on the specific type of ETF investment. futures contracts. Specific futures contracts are divided into two types:
(1) ETFs exposed to regulated futures contracts:
This refers to holding a certain amount in its investment portfolio An ETF that holds a portion of or proportion of regulated futures contracts and is therefore sensitive to the market performance, price fluctuations or risks associated with those contracts. Under Section 1256 of the U.S. Internal Revenue Code (IRC), a "regulated futures contract" means a contract that: (a) requires deposits and allows withdrawals based on the amount marked to market) mechanism; (b) the contract is traded on a compliant exchange or is subject to its rules.
For futures Bitcoin ETFs, if their portfolio includes Bitcoin contracts traded on the Chicago Mercantile Exchange (Bitcoin contracts are generally traded on the Chicago Mercantile Exchange), since the exchange is a contract If there is a regulated exchange, the ETF is an ETF exposed to regulated futures contracts.
If a Bitcoin ETF’s portfolio includes regulated futures contracts as defined in IRC Section 1256, no matter how long the investor holds the ETF (even for just one day), when they sell the ETF and receive When profits are made, 60% of these profits will be treated as long-term capital gains and 40% as short-term capital gains.
(2) ETFs exposed to unregulated futures contracts:
This refers to contracts in the ETF’s portfolio that are only traded in informal, unregulated markets. Such as over-the-counter (OTC) contracts. These contracts may be subject to no or only limited regulation, and their terms and conditions can be freely negotiated between the respective counterparties. Such ETFs generally carry higher risks due to a lack of standardization and transaction transparency.
The taxation method of this type of ETF is consistent with the taxation method of general capital gains, and is also consistent with the taxation method of spot Bitcoin ETF; this will be discussed uniformly below.
3.2 Tax treatment for U.S. tax residents investing in spot Bitcoin ETFs
The tax rules for spot Bitcoin ETFs are consistent with the tax rules for general capital gains tax. If you sell a Bitcoin ETF asset after holding it for less than a year, the short-term capital gains generated are subject to ordinary income tax. If a share is sold after being held for more than 12 months, the long-term capital gains generated are subject to capital gains tax. The specific tax rate applied depends on the investor's tax filing status and his or her income level.
3.3 Capital gains tax rates applicable to U.S. resident individuals and corporate investments in ETFs
3.3.1 Tax rates for U.S. resident individuals< /p>
Long-term capital gains: Based on the investor’s total taxable income and tax filing status, it is divided into three tax brackets: 0%, 15%, and 20%. For single taxpayers or heads of household, long-term capital gains up to $44,625 are tax-free; long-term capital gains between $44,625 and $492,300 are taxed at 15%; and above $492,300, the tax rate is 20%.
Short-term capital gains/dividend income: Taxed at income tax rates, ranging from 10% to 37%, depending on total taxable income and tax filing status. For example, for a single taxpayer or head of household, the applicable tax rate is 10% on taxable income up to $11,000 and 37% on taxable income above $578,125.
Other taxes: If an investor's net investment income or adjusted gross income (MAGI) exceeds certain thresholds, the investor may be subject to a 3.8% Net Investment Income Tax (NIIT) on income above certain thresholds. The thresholds for NIIT are as follows: $200,000 for a single taxpayer or head of household, $250,000 for a married couple filing jointly, and $125,000 for a married couple filing separately.
3.3.2 Tax rate for US resident companies
Corporate ETFs are taxed in the same way as individuals, including recognition as long-term capital gains and short-term capital Gain. The tax rate on net capital gains is 21%. For businesses, gains or losses on the sale or exchange of capital assets held for more than 12 months are considered long-term capital gains or losses. Gains or losses on the sale or exchange of capital assets held for 12 months or less are considered short-term capital gains or losses. The amount by which net long-term capital gains exceed net short-term capital losses is considered a net capital gain and is taxed on that basis. If long-term capital gains are lost but there are short-term gains, the short-term can only be taxed first and the long-term losses cannot be deducted.
3.4 Special provisions for US ETF taxation
Bitcoin ETFs are also subject to wash-sale rules (wash-sale). The so-called wash sale refers to the trading behavior of selling or trading securities at a loss and buying "substantially equivalent" securities or obtaining a contract or option to buy "substantially equivalent" securities within 30 days before and after. If the losses are determined to be invalid, the wash sale losses will not be tax deductible and will be added to the cost of the new Bitcoin ETF, thereby increasing the cost basis. This cost adjustment is equivalent to deferring the tax deduction for losses until the time of disposal of the new Bitcoin ETF. In addition, the holding period calculation for the new Bitcoin ETF must include the holding period of the previously sold Bitcoin ETF.
If the underlying asset package of a certain ETF includes not only Bitcoin, but also other assets, such as currencies, futures and metals, then individual ETFs that invest in these special assets are subject to specific tax rules.
Currency ETFs: Most currency ETFs adopt the form of a client trust, which means that the profits from the trust form a liability to the ETF holders. tax liability and are taxed as ordinary income. There are no special tax treatments for this type of ETF, such as long-term capital gains, even if the ETF has been held for several years. Because currency ETFs trade currency pairs, tax authorities assume these transactions occur in the short term.
Futures ETFs: These funds trade futures contracts on commodities, stocks, U.S. Treasury bonds, and currencies. Regardless of the holding period, the gains and losses generated by futures held by such ETFs are taxed at a rate of 60% long-term and 40% short-term. In addition, ETFs that trade futures are subject to mark-to-market rules at the end of the year. In other words, unrealized gains (floating profits) at the end of the year are regarded as sales and tax is required.
Metal ETFs: If you trade or invest in gold, silver or platinum, these precious metals are considered "collectibles" in the eyes of the taxman, and this policy also applies to trading Or ETFs that hold gold, silver or platinum. For individuals, gains from collections are taxed as ordinary income if they are short-term. If you hold it for more than one year, you will be taxed at a higher capital gains tax rate of 28%, which means you will not be able to enjoy the benefits of the normal long-term capital gains tax rate.
4. Tax treatment for Hong Kong residents investing in Bitcoin ETFs
Hong Kong investors investing in Bitcoins from other countries or regions When investing in currency ETF funds, withholding tax will be paid. For example, Hong Kong residents investing in U.S. Bitcoin ETFs: Since there is no double taxation agreement (DTA) between Hong Kong and the United States, as non-U.S. tax residents, Hong Kong investors need to pay a 30% withholding tax on dividends from U.S. ETFs. However, Bitcoin ETFs do not generate dividends, so there is no withholding tax issue. At the same time, Hong Kong residents do not need to pay capital gains tax when investing in U.S. ETFs and only need to pay taxes in accordance with Hong Kong regulations.
At the Hong Kong income tax level, due to the territorial source principle of Hong Kong tax law, income generated outside Hong Kong is generally not taxed. Therefore, unless there is a specific Hong Kong element to the transactions or gains from a Bitcoin ETF, Hong Kong investors generally do not need to pay additional tax in Hong Kong on these gains.
5. Tax treatment of Singapore residents investing in Bitcoin ETFs
Singapore investors will pay a pre-tax when investing in Bitcoin ETF funds in other countries or regions. Raise taxes. For example, if a Singaporean resident invests in a U.S. Bitcoin ETF: There is no DTA between Singapore and the United States. Therefore, the tax paid by Singaporean investors in the United States is similar to that of Hong Kong investors, and they need to pay a 30% withholding tax on ETF dividends. However, similarly, because Bitcoin ETFs do not generate dividends, there is no withholding tax issue when investing in Bitcoin ETFs; and Singapore residents do not need to pay capital gains tax when investing in US ETFs, and only need to pay taxes in accordance with Singapore regulations.
Singapore’s tax law also implements the territorial source principle and only taxes income generated in or sourced from Singapore. However, the Singapore Income Tax Act provides that income generated outside Singapore is also deemed to be “Singapore source” if it is remitted, transmitted or brought into Singapore.
Individual investors who remit their income from investing in Bitcoin ETFs into Singapore will generally have to pay personal income tax on this income. Singapore's personal income tax in 2024 ranges from 0% to 24%, depending on the individual's taxable income.
Singapore resident companies have tax exemptions for dividend income from overseas sources, if: (1) When the income from overseas is received in Singapore, the highest corporate tax rate of the overseas country that generated the income is (Title tax rate) is at least 15%; (2) the income has already been taxed overseas; (3) the authorities believe that tax exemption will be beneficial to the resident company.
With the adjustment of Singapore’s tax laws, starting from January 1, 2024, income from the sale of foreign assets may be subject to tax when remitted to Singapore under certain conditions, which reflects Singapore’s gradual alignment with international tax standards. trend. However, for income from investing in Bitcoin ETFs, investors generally only have to bear U.S. withholding tax obligations if the income is not remitted to Singapore.
6. Conclusions and Suggestions
By examining the tax treatment of residents of the United States, Hong Kong, and Singapore investing in Bitcoin ETFs, we can find that: Bitcoin ETFs are related to factors such as their place and type of registration, the investor’s place of residence, and the jurisdiction where the investment target is located. Investors can understand the tax policies of the place of residence and the place where the ETF is registered in terms of creating redemptions and Bitcoin investors’ returns, etc. Properly plan ETF tax burden and profits.
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