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Welcome back to Tax Wise newsletter - 3rd Edition!

Our first newsletter of 2024 is going to be about the historic event of the year - Approval of Bitcoin ETF.

On 10th January, 11 funds including GrayScale, Black Rock, and Fidelity got approved by the US SEC, to trade Bitcoin Spot ETF!

But first, what is an ETF?

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What is Bitcoin ETF?

Bitcoin ETF is an ETF where the underlying asset is Bitcoin. So, instead of stocks or bonds, Bitcoin’s price will be tracked. 

 

If you are wondering, how is an ETF different from a Mutual Fund or Index?

The key difference is that in an ETF you can trade throughout the day while in the case of a Mutual Fund or Index, you can only buy/sell once a day.

But Why Bitcoin ETF?

Direct investment in Bitcoin comes with storing the bitcoin, platform fees, commission and safety issues. Bitcoin ETF allows you to get exposure without direct investment in it. It gives you instant access and ease for retail investors to diversify their portfolios.

Let’s rewind to 2013 when the first request for a Bitcoin spot ETF was submitted by the Winklevoss twins.

 

SEC rejected the request saying it’s still an immature market for Crypto Currency.

 

In 2021, the SEC approved Bitcoin Future ETF. At the time GrayScale Investments submits another request for Bitcoin spot ETF to the SEC.

 

The matter went to the court and the argument was simple now, 

If the SEC can approve Bitcoin Future ETF, then the same setup applies to Bitcoin Spot ETF. As the underlying asset for both is the same- Bitcoin.

 

And the SEC failed to give a proper explanation for the rejection.

SEC’s X handle was compromised!

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On 9th January, a false announcement was made through the SEC’s X account, approving the Bitcoin Spot ETF. 

 

Result? Bitcoin prices shoot up to $47,000!!

 

The SEC later had to delete the post and clarify that it had not approved the Bitcoin ETF yet.   

 

As a result, Bitcoin prices fell back to below $46,000.

How will Bitcoin Spot ETFs be taxed in India?

Income from any Virtual digital assets (Bitcoin, Ethereum, NFTs, etc) is taxed at a flat 30%. 

 

But you don’t really own any Bitcoin of your own when you invest in a Bitcoin ETF.

Is it classified as a Mutual Fund then? – No. It’s not a specified mutual fund by SEBI.

 

Is it classified as a Mutual Fund? – No, it’s not a specified mutual fund by SEBI.

Investment in Bitcoin ETF falls into the residual case and is classified as a capital asset under Section 112 of the Income Tax Act and taxed at 20% rate if held for more than 36 months.

CBDT may issue a notification to give precise clarity on the taxation of Bitcoin Spot ETF.

 

Important points if you are an Indian resident, and wish to invest in Bitcoin Spot 

ETF:

 

  • Bitcoin ETF investment is not approved in India yet if you wish to invest overseas it’s possible.

 

  • LRS (Liberalised Remittance Scheme) will be implied which constrains the investment amount to $250,000 in any given year with a TCS of 20%!

That brings us to the end of this month's edition. We would love to know your feedback.

For any tax-related questions, schedule a call with a qualified expert here - Talk to an expert

 

Best regards,

Team TaxBuddy.com

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