How are Bitcoin ETFs taxed?
ETFs are rapidly becoming a popular investment choice for investors in the cryptocurrency space and those looking to diversify their portfolio. However, they do come with a tax bill.
This guide covers how Bitcoin ETFs are taxed based on the type of ETF and your holding period.
How are Bitcoin ETFs taxed?
The fundamental tax treatment of Bitcoin ETFs will be similar to holding Bitcoin directly. In most countries, including the USA, UK, Canada, and Australia, ETFs that invest in capital assets or property, like crypto, will be subject to tax.
If you sell your Bitcoin ETF, you’re making a capital gain or loss, which is liable to capital gains tax. You will not be taxed for simply holding a Bitcoin ETF.
These tax rates depend on how long your investment was held:
Short-term capital gains tax: This applies to funds being held for less than a year and is taxed at ordinary income tax rates, which range between 10% to 37%.
Long-term capital gains tax: This applies to funds held longer than a year and is taxed at preferential rates depending on your income. This ranges between 0% to 20%.
How are Spot ETFs taxed?
When you purchase a Bitcoin Spot ETF, you essentially buy a share of the Bitcoin held by the ETF, without actually owning the Bitcoin directly. As a result, your gains or losses are subject to capital gains tax.
For Spot ETFs, dividend distributions won’t be applicable even though you may be accustomed to receiving these in ETFs, such as those that track an index, like NASDAQ, where underlying companies regularly issue dividends.
Holding an ETF generally does not adversely affect investors for tax purposes when cash redemptions occur. This was a point of confusion during the application process for Bitcoin spot ETFs, and Greyscale issued clarification on this matter.
In the USA, the spot ETFs are typically structured as ‘grantor trusts’, meaning that the acquisition of assets (or “carrying value) held by the underlying ETF does not lead to a taxable event for ETF investors.
EXAMPLE
Imagine a spot Bitcoin ETF where 500 units correspond to one underlying Bitcoin. An investor buys 100 Bitcoin ETF shares for $10,000. The next month, the total value increases to $18,500, prompting the investor to redeem for cash.
Taxable Capital Gain: In this scenario, the investor incurs a taxable capital gain, calculated as the difference between the purchase and redemption prices ($10,000 - $18,500 = $8,500).
IRS Reporting: The taxable capital gain from the redemption is reported to the IRS on an IRS Form 1099-B.
How are Futures Bitcoin ETFs taxed
Futures Bitcoin ETFs do not invest in Bitcoin itself, but rather a Bitcoin futures contract. This affects how tax is treated.
In this case, 60% of your gains are taxed as long-term gains, and 40% as short-term gains, regardless of your holding period.
Are Bitcoin ETFs more tax efficient than direct Bitcoin investments?
Bitcoin ETFs are generally considered more tax-efficient than directly investing in Bitcoin (BTC). Bitcoin ETFs can be held in regular retirement accounts and only trigger a taxable event when sold. Whereas BTC cannot, and any sale, buy, or trade of your Bitcoin can trigger a taxable event.
There are, however, trade-offs when choosing to invest in a Bitcoin ETF over BTC. The main factor to consider is that, through an ETF, you do not actually own any Bitcoin. This means you cannot use it for regular day-to-day payments, you rely on the manager and custodians to safely store the Bitcoin, and you may be subject to management fees.
How to report Bitcoin ETFs
To report your Bitcoin ETF, you need to accurately track the price of the ETF when you bought it, the price you sold it at, and any fees related to it. This will be calculated on Form 8949 and recorded on Schedule D, which will be used with your tax return. Your broker will also send you a 1099-B to summarize your trades.
Is there a Bitcoin ETF tax calculator?
Koinly is a crypto tax calculator that can help you calculate profits and losses from ETFs, and other crypto investments. Just connect your crypto platform via API or by uploading a CSV file and Koinly will do the rest.
