That’s a key differentiator between BITO, XBTF and the Valkyrie Bitcoin Strategy ETF (BTF) in a market segment defined by how little leeway the SEC has given for regulated investment vehicles that use bitcoin as an underlying.
All three funds are competing for the same set of near-month bitcoin futures contracts, and all three are battling to serve a market of investors who want crypto exposure without directly holding the asset.
But ProShares and VanEck both say their product has the edge thanks to a quiet, often overlooked part of launching an ETF: the corporate structure.
What’s The Argument?
The vast majority of ETFs, including BITO, are structured as registered investment companies (RICs), because they distribute at least 90% of their income and capital gains to their investors.
XBTF is structured as a C corporation, so its investors have to pay the corporate tax on top of what they would pay on income from distributions. However, C corps have the ability to carry losses back or forward several years come tax time.
Only a handful of ETFs use the C corp structure, and that group is primarily within funds that provide access to energy-focused master-limited partnerships.
At issue is whether the C corp structure’s potential benefits outweigh its more obvious downsides.
Kyle DaCruz, VanEck's director of digital assets product, says the RIC structure doesn’t have the tax flexibility to benefit in the event that bitcoin suffers a prolonged down period.
“An RIC can’t do anything with those losses in a year where bitcoin is down 50% or 60%, or whatever percent. An RIC just loses that value,” he said.
But in a conversation with ETF.com Managing Editor Heather Bell, ProShares Head of Investment Strategy Simeon Hyman argued that those benefits will only be available in the event of a down year, while the costs associated with that tax benefit will be collected in bull times.
Unfortunately, but there’s no all-encompassing answer here.
Robert Velotta, a tax partner at Cohen & Co., recommends investors speak to a tax advisor regarding their specific situation and goals in buying shares of a bitcoin-futures-powered ETF.
“It’s very detailed, and what I would say is best for me may be different for people in other scenarios,” he said.
Here are a few factors that investors should consider when comparing these two structures with an expert. However, these are broad guidelines and should not be taken as hard and fast rules, as any combination of these and other factors can alter what product best suits a given investor.
|C-Corp (XBTF)||RIC (BITO)|
|Qualified distributions||C-Corp dividends are more likely to be classified as qualified distributions, much like a dividend from a normal company would.||RICs can only pay qualified dividend income if it generates that income itself under IRS rules. If that doesn’t occur, investors may end up paying taxes at the higher income tax rate rather than the capital gains rate.|
|Carryback/Carryforward||The fund can carry capital losses back three years and forward five years.||There’s no option at the fund level to carry losses forward or back.|
|Tax-deferred/tax-exempt accounts||The benefits of a C-Corp aren’t applicable to those in tax-exempt or tax-deferred accounts, and could see reduced performance from the drag on NAV.||Without the corporate tax drag, the NAV will likely be a closer representation of the fund’s overall value.|
|NAV||Funds accrued to pay for tax expenses will show up in the NAV, creating a corporate tax drag.||RICs don’t accrue tax expenses in their NAVs.|