On January 10, 2024, the SEC approved the listing and trading of 11 spot bitcoin exchange-traded products. These products, known as spot bitcoin ETFs, began trading on January 11, 2024. Now that they are officially on the market, a natural — and important — question is, how will they be taxed?
For the last several years, investors have been able to gain exposure to bitcoin through funds that traded futures contracts. Many of these funds are taxed as regulated investment companies (RICs), similar to open-end mutual funds and ETFs. RICs use a blocker corporation, such as a Controlled Foreign Corporation, to trade bitcoin futures. While this may be an inefficient approach from a tax perspective, it allows the fund to meet RIC qualification requirements.
Importantly, spot bitcoin ETFs are not treated as RICs. Direct holding of bitcoin with no other activity would not meet the RIC qualification requirements.
Spot bitcoin ETFs are taxed, instead, as grantor trusts. Grantor trust owners are treated is if they own a pro rata share of the underlying asset held by the trust. Similar to RICs, there are various tax requirements that apply to investment trusts. One such requirement is that there is no power to vary the trust’s investments, meaning, in this case, the trust only holds bitcoin and nothing else.
What does this mean for shareholders? If treated as a trust for tax purposes, a spot bitcoin ETF will provide a tax information statement to shareholders after year-end. This allows them to report their pro rata share of trust income and expenses on their personal tax returns. This is different from RIC treatment, where shareholders are taxed on distributions received. If a shareholder in a spot bitcoin ETF is itself a RIC, the investment in the spot bitcoin ETF would not be considered qualifying for purposes of the RIC qualification rules.
The listing and trading of spot bitcoin ETFs is an opportunity for investors seeking bitcoin exposure. Because of their unique structure, though, both fund managers and shareholders should give careful consideration and conduct proper planning when embarking on this nascent asset class.
Contact Jay Laurila at jlaurila@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.