Another Bitcoin Futures ETF Launched Today. But Bitcoin Itself Is Ailing.
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Three Bitcoin futures exchange-traded funds are now trading.
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Another exchange-traded fund holding Bitcoin futures is hitting the market, even as prices for the world’s largest cryptocurrency keep dropping.
The VanEck Bitcoin Strategy Fund (ticker: XBTF) started trading on Tuesday, holding Bitcoin futures contracts listed on the Chicago Mercantile Exchange.
The fund joins two other Bitcoin futures ETF that launched in October: the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF)
All of the funds gain exposure to Bitcoin through futures contracts because the Securities and Exchange Commission hasn’t approved an ETF that could own Bitcoin directly. Last week, regulators rejected VanEck’s application for a spot-based ETF, arguing the market could still be manipulated.
The VanEck fund will be lower-cost than rivals, according to the investment management firm. Its expense ratio is 0.65% versus 0.95% for both the ProShares and the Valkyrie ETFs.
VanEck also said its ETF could be more tax efficient for long-term investors because it’s structured as a C-corporation rather than a registered investment company, or RIC—the structure of the other two ETFs.
ETFs structured as C-corps have to pay taxes at the corporate rate, which is 22.15% for the VanEck fund—at the state and federal levels. ETFs structured as RICs can avoid fund-level taxation by passing through income to investors.
That tax drag comes out of the VanEck ETF’s daily net asset value, which will make returns “look worse than the competitors in the near term,” explained Kyle DaCruz, VanEck’s director of digital asset products.
But DaCruz said investors in for the long haul could come out ahead for a couple of reasons. For one, an ETF structured as a C-corp can accrue tax losses at the fund level, offsetting gains; and it can reclaim taxes paid on gains from prior years.
Moreover, a futures ETF structured as C-corp may distribute only 40% of income, which is eligible to be taxed as qualified dividend income, equivalent to long-term capital gains rates—generally 15% to 20%. The other 60% of income is held at the fund level, subject corporate taxation.
An ETF structured as a RIC, by contrast, must distribute 100% of gains and income, and it may be taxed at ordinary income rates up to 37%.
The ProShares and Valykrie ETFs both hold Bitcoin futures through a Cayman Islands subsidiary, making them ineligible for tax-loss accruals at the fund level.
The bottom line: The different tax treatments each have advantages and drawbacks. If an investor is holding a Bitcoin futures ETF in a nontaxable account such as an IRA, an ETF structured as a RIC may be the better choice since the investor wouldn’t pay taxes anyway.
On the other hand, a C-corp ETF that can accrue tax losses could wind up more tax efficient if the price of Bitcoin falls. Its distributions also may be taxed at lower rates if it’s held a taxable account, compared to an ETF structured as a RIC.
“Our fund is appropriate for taxable long-term investors,” said DaCruz.
One other note: VanEck’s ETF can use leverage to maintain targeted exposure to Bitcoin—borrowing capital to push the fund’s exposure above 100%. That may be great if Bitcoin is rallying, but could amplify losses in a down market.
Indeed, more important than taxation may be the performance of Bitcoin itself—and the world’s largest cryptocurrency has been struggling lately. It was down 5.9% to about $60,600 in trading on Tuesday, after dipping as low as $59,000. It’s now-well-below its all-time high of $69,000 nearly a week ago.
The selloff may reflect new nervousness about China, which has said it would crack down on state-owned enterprises that participate in mining or producing Bitcoin, according to digital-asset research firm Fundstrat. China is also laying blame on crypto mining for its strained energy infrastructure, Fundstrat said.
One other factor weighing on Bitcoin could be new tax rules in the infrastructure bill that President Joe Biden signed into law on Monday. Crypto “brokers” may soon have to issue standard 1099-B forms for transactions, and any business that receives more than $10,000 in crypto will have to report it like a cash transaction, including identifying details of the sender.
Write to Daren Fonda at daren.fonda@barrons.com
