XBTF Structure Offers Potential Tax Advantages | ETF Trends

Regulators still haven’t approved a spot bitcoin exchange traded fund, and near-term prospects to that effect remain murky, but U.S. investors still have bitcoin futures-based ETFs to consider.

That group includes the VanEck Bitcoin Strategy ETF (XBTF). The actively managed XBTF debuted last November and currently holds June and July bitcoin futures contracts as well as Treasury bills. While that’s a familiar approach among U.S.-listed bitcoin futures ETFs, XBTF is proof positive that structure matters.

Said another way, XBTF separates itself from rivals because it is structured as a C-corporation (C-corp), not a regulated investment company (RIC). Most traditional ETFs, such as those holding stocks and bonds, are formed as RICs, but with an asset such as bitcoin, the C-corp structure is preferable.

“If a fund elects to be treated as a C-Corp for tax purposes, it does not have the same requirements for diversification and qualifying income. It will be required to pay taxes at the fund level and any distributions to investors are also taxable to investors,” noted VanEck product manager John Patrick Lee. “This potential for ‘double taxation’ is generally something to avoid and why most funds elect to meet RIC requirements. However, the tax treatment of Bitcoin futures, and specifically how a fund structures its investments in order to meet the RIC requirements, may result in a C-Corp being more tax efficient, particularly for individuals in higher tax brackets and for corporations.”

Adding to the allure of XBTF is its annual fee of 0.65%, or $65 on a $10,000 stake. That’s favorable relative to rivals in this still-young ETF category. However, XBTF has more compelling traits, including tax efficiencies, which could make the fund appropriate for satellite positions in retirement accounts.

“While nuanced, the taxation differences can have a material impact on shareholder outcomes and are an important consideration for any taxable investor. Investors looking for Bitcoin futures exposure may find that an ETF structured as a C-Corp may offer better after-tax returns. Given this, XBTF was purposefully structured as C-Corp,” added VanEck’s Lee.

In fact, as Lee pointed out, investors who opt for bitcoin futures ETF that are structured as C-corps, such as XBTF, may generate returns that are up to 16% superior to those offered by rivals structured as RICS in years in which bitcoin rallies. That difference comes by way of the fact that XBTF is taxed 21% at the fund level while a RIC bitcoin ETF can have taxes as high as 37%.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.