How are Bitcoin ETFs taxed?
With the SEC approval of Bitcoin ETFs and Ethereum ETFs in recent months, they're a more popular investment than ever - but they'll come with a tax bill.
Before we dive in, make sure you check out our dedicated guides on Bitcoin ETFs and Ethereum ETFs to learn more about ETFs, how they work, and where to invest.
Bitcoin ETF taxes: How are ETFs taxed?
The fundamental tax treatment of a Bitcoin ETF will be similar to holding Bitcoin directly. In most countries such as the USA, UK, Canada, and Australia - ETFs that invest in capital assets or property such as crypto will be taxed as such. This means you need to consider whether you’ve made a capital gain or loss when you sell holdings in the ETF. If you’ve made a capital gain, you’ll be liable for Capital Gains Tax.
ETFs are commonly referred to as being ‘tax efficient’ for their ability to influence when capital gains are distributed to investors. However, with a spot Bitcoin ETF, it’s worth noting that dividend distributions won’t be applicable even though you may be used to receiving these in ETFs such as those that track an index such as NASDAQ where underlying companies regularly issue dividends.
It’s important to know that 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 acquiring 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.
You can read more about crypto and Capital Gains Tax in your country in our guides:
Is there a crypto ETF tax calculator?
Yes! 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.
