In-Kind Model: A Tax-Efficient Approach
During his recent podcast, Bloomberg analyst James Seyffart discussed the in-kind transaction model used in ETFs. This involves authorized participants or market makers who create and redeem ETF shares by collecting and providing Bitcoin to the issuer, enhancing the tax efficiency of ETFs by reducing taxable events while maintaining a minimal differential between the Net Asset Value (NAV) and market prices.
Cash Transactions: More Tax Burden
Comparatively, the cash transaction model, more commonly seen in mutual funds, induces a taxable event at the fund level when authorized participants exchange cash for ETF shares, ultimately exposing investors to potential capital gains taxes, unlike the in-kind model.
Capital Gains: A Comparative Analysis
Seyffart highlighted that ETFs following the in-kind approach rarely distribute capital gains, unlike mutual funds, which distribute capital gains at the end of the fiscal year, leading to a more substantial tax burden for investors.
Industry Efforts and SEC’s Stance
Seyffart acknowledged the Securities and Exchange Commission’s reservations about the in-kind model, while noting the industry’s efforts to advocate for this approach. He emphasized aligning with the desires of issuers and investors to enhance tax efficiency and operational effectiveness.
Hot Take
Seyffart anticipates the potential approval of the first Spot Bitcoin ETFs around 2024, expecting a swift listing on the NYSE Arca, with the order dictated by issuers.
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