It’s tax season, and for many retail investors new to crypto in 2021, it’s about to be a confusing and potentially costly time when it comes to filing taxes. Tax guidelines around crypto remain somewhat murky in the U.S., confusing those investors with spot cryptocurrency exposures. In contrast, more traditional crypto equity and ETF exposure remains familiar and easier when it comes to taxes.
Taxes are due by April 18 this year. While most cryptocurrencies, NFTs, and the like fall under the title of property according to the IRS and therefore are subject to capital gains taxes, some actions and crypto investments instead are treated as income and thus fall under income tax. CoinDesk recently broke down a simple explanation of the different qualifications for each to try and bring a little bit of clarity. The bottom line, though, is that if you invested in crypto directly, your best course of action is to partner with a tax professional.
Capital gains are incurred when any of the following actions are taken for tax purposes: when you send cryptocurrency as a gift, when you sell cryptocurrency for fiat currency like the U.S. dollar, when any good or services were purchased with a cryptocurrency, and when swapping or trading a digital asset for another digital asset. In the NFT craze of last year, this means many individuals incurred capital gains when buying an NFT with their cryptocurrency.
Income taxable events in the eyes of the IRS remain somewhat nebulous and undefined regarding specific areas of crypto, such as minting new tokens and DeFi. This makes ensuring that you file your crypto income-taxable actions accurately a lot more difficult. Some of the major income tax qualifying events include crypto interest earnings when lending within DeFi, any crypto earned from liquidity pools or interest-bearing accounts, receiving cryptocurrency from airdrops, income from crypto mining block rewards or transaction fees, and receiving payment in the form of cryptocurrency for work done.
There are lots of gray areas still, however, in the eyes of the IRS; DeFi, crypto earned from staking, minting NFTs, and many actions, and partnering with a tax professional is both prudent and wise. If you’ve only partaken in one or two crypto trades over the course of 2021, your taxes will be much simpler than investors who dabbled and invested across the crypto spectrum.
Investing in crypto equities is a much more familiar and well-trodden ground for tax reporting, as they act just as traditional equities would. What’s more, investing in crypto through an ETF wrapper offers the familiarity and reassurance of known tax classifications.
The Bitwise Crypto Industry Innovators ETF (BITQ) offers investment into some of the largest companies within crypto in a variety of segments.
BITQ tracks the Bitwise Crypto Innovators 30 Index, an index with at least 85% allocation into companies that are cryptocurrency exchanges carrying bitcoin and other cryptocurrencies, crypto miners, mining equipment companies, and service providers. The remaining 15% is allocated to large-cap support companies, with at least one major part of their businesses dedicated to crypto.
BITQ carries crypto companies such as Silvergate Capital (SI), a bank that provides services for crypto exchanges, at 11.45%; Coinbase Global Inc (COIN), a popular crypto exchange, at 9.48%; and crypto mining companies such as Hut 8 Mining (HUT) at 4.70%.
The fund has an expense ratio of 0.85%.
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