The arrival of spot Bitcoin ETFs has brought excitement and price movement to the Bitcoin market. By allowing more traditional investors an avenue in which they can purchase exposure to Bitcoin (BTC), spot Bitcoin ETFs have brought all sorts of new money into the sector.
With the ability to purchase spot Bitcoin ETFs in the US and abroad, you may be wondering whether you can use one in order to save on taxes. The short answer is yes and no, but we’ll get into the nuances and tax implications which you’ll be subject to when buying Bitcoin directly, or through a spot Bitcoin ETF. Let’s jump in.
As a reminder this article is for informational purposes only and you should always contact a tax professional for serious tax issues.
Buying a Spot Bitcoin ETF vs BTC
There are a few differences when buying into a spot Bitcoin ETF versus buying Bitcoin directly. The first of which is that you’ll have to pay the ETF provider a management fee for managing the fund, whereas if you just bought BTC there is no extra cost in holding it.
The second difference is that you can only buy and sell your spot Bitcoin ETF shares during the market hours of the exchange where they’re traded. This is a stark difference to owning regular Bitcoin, as it’s traded 24/7, meaning you can take advantage of price swings during the middle of the night to sell, or to buy a dip.
Another difference between buying a spot Bitcoin ETF and buying Bitcoin directly is that you can’t use your spot Bitcoin ETF for liquidity on decentralized finance platforms like Uniswap or AAVE. While this isn’t necessarily a bad thing for more risk averse investors, the returns for providing liquidity are quite lucrative to many and can be worth the risk.
Finally, and likely most importantly, the main difference between buying a spot Bitcoin ETF versus buying BTC directly is that you can include spot Bitcoin ETFs in self-directed retirement plans such as 401ks, IRAs, and RRSPs. Unfortunately, you cannot, as of yet, do the same with actual Bitcoin, but this could change over time.
Tax Implications
Now when it comes to tax implications when buying a spot Bitcoin ETF versus buying Bitcoin directly, there are essentially no differences. You are still subject to capital gains taxes if your ETF shares increase in value and you sell, just like if your Bitcoin increased in value and you sold it.
However, there is one other thing to keep in mind with a spot Bitcoin ETF. As part of the management of these ETFs, the ETF will likely have to sell small portions of Bitcoin throughout the year. If they’re selling that Bitcoin at a profit, then it’s subject to capital gains, and the members of the ETF will be taxed in proportion to their holdings, even if they didn’t sell any of their ETF shares. This isn’t something you’d have to pay by just buying and holding Bitcoin.
Other than that, spot Bitcoin ETFs and Bitcoin are taxed in the same way. If you buy and sell either spot Bitcoin ETFs or Bitcoin within a 12-month period, then you’ll be subject to income tax on your gains rather than just capital gains tax. This could be up to 37% in the US. As long as you hold it for more than a year, the most you can pay in tax in the US is 20% (unless you do really well, then there’s an additional 3.8%).
As mentioned in the previous section though, you can include spot Bitcoin ETFs in self-directed retirement plans. These are tax-sheltered, meaning that they can give you a big tax break compared to if you just bought Bitcoin and sold it for capital gains in the future.
Though company-directed retirement plans are unlikely to include Bitcoin as of yet, if the asset keeps performing well, they may change their tune. The same can be said for being able to store Bitcoin in its pure form in tax-sheltered retirement plans. Time will tell, but as of now, spot Bitcoin ETFs are your better option to save on tax.
Closing Thoughts
Buying Bitcoin exposure in the form of a spot Bitcoin ETF isn’t really any worse than buying Bitcoin directly in terms of tax implications. There is a possibility of paying some extra taxes due to the ETF selling Bitcoin at a profit, but that should be somewhat negligible. However, you will be paying those taxes in addition to the ETF management fee. Putting your spot Bitcoin ETF into a retirement plan can help avoid this though.
Spot Bitcoin ETFs allow more traditional investors a way to buy Bitcoin without much technical knowledge, and being able to include them in retirement plans to save on taxes is definitely worth taking note of. Hopefully, Bitcoin itself will eventually be allowed in these plans as well.
