How the IRS Will Tax Bitcoin ETFs in 2025

Bitcoin ETFs have recently become a major focus in the financial world, particularly with the recent approval by the SEC. Understanding how these ETFs are taxed is crucial for investors navigating the cryptocurrency market. In many jurisdictions, including the US, UK, Canada, and Australia, ETFs investing in capital assets or property (such as cryptocurrencies) are taxed accordingly.

Investors are required to pay taxes on gains from Bitcoin ETFs. Similar to holding Bitcoin directly, selling ETF shares can result in either capital gains or losses, typically subject to taxation. The tax treatment of Bitcoin ETFs varies based on factors such as the holding period and the investor's overall taxable income. Understanding and fulfilling tax obligations is essential for investors to comply with tax laws and avoid potential penalties or legal issues.

Bitcoin crosses $100,000: implications for ETF investors

In December 2024, Bitcoin exceeded the $100,000 mark, a historic milestone with significant implications for Bitcoin ETF investors. For ETF holders, the milestone serves as a reminder to evaluate their portfolios, consider tax implications, and use tools like ours at TokenTax to stay compliant and maximize returns.

Do you pay taxes on ETF gains?

US investors are required to pay taxes on gains from Bitcoin ETFs. When selling ETF shares, investors must consider whether they've realized a capital gain or loss, determining their tax liability.

Understanding the tax implications and fulfilling tax obligations is crucial to ensure compliance with regulations and avoid potential legal consequences. When in doubt, our team of crypto tax professionals at TokenTax is available to assist.

Spot ETFs, which directly hold the underlying assets, are taxed similarly to holding the asset itself. Gains from selling shares in a spot ETF are subject to capital gains tax, depending on the holding period.

Short-term capital gains (from assets held for less than a year) are taxed at ordinary income rates, while long-term gains (from assets held for more than a year) are taxed at lower rates. It's essential to keep accurate records of these transactions to report them correctly on tax returns.

Futures ETFs, which invest in futures contracts to gain exposure to asset price movements, have a unique tax structure. The IRS applies the 60/40 rule, where 60% of gains are treated as long-term capital gains and 40% as short-term, regardless of the holding period.

This blended tax rate can provide advantages for investors, potentially resulting in lower overall taxes compared to other investment types. Futures ETFs also follow mark-to-market rules at year-end, meaning unrealized gains are taxed as if sold.

Bitcoin ETFs and direct Bitcoin holdings are generally subject to similar capital gains tax rates based on the holding period. Short-term gains are taxed at ordinary income rates, while long-term gains benefit from lower tax rates.

While the tax rates may not differ significantly, the ETF structure may offer additional benefits such as ease of management and potential tax efficiencies through in-kind transactions, which can help optimize an investor's tax situation.

Bitcoin ETFs offer several advantages over direct cryptocurrency holdings. Trading ETFs on stock exchanges provides flexibility and liquidity, enabling investors to manage their portfolios more efficiently. Some key benefits include:

• Lower costs: Bitcoin ETFs do not incur wallet, transaction, or network fees, which can significantly reduce expenses compared to holding cryptocurrencies directly.

• Ease of use: Trading Bitcoin ETFs through a brokerage is often simpler than managing a digital wallet, making it more accessible for many investors.

• Retirement planning: Investing in Bitcoin ETFs through a brokerage is easier than setting up a self-directed IRA, simplifying the incorporation of cryptocurrency exposure into long-term financial planning.

These advantages make Bitcoin ETFs an attractive option for investors seeking exposure to cryptocurrency without the complexities of direct ownership.

US taxpayers are subject to taxation on the resulting capital gains upon selling Bitcoin ETF assets. If ETF shares are held for less than a year before selling, the resulting short-term capital gains are taxed at ordinary income tax rates. These rates vary depending on the investor's overall taxable income and filing status, which range from 10% to 37%.

If ETF shares are held for over a year before selling, the resulting long-term capital gains are taxed at lower rates of 0%, 15%, or 20%. Short-term capital gains from selling Bitcoin ETF shares held for less than a year are taxed at regular income tax rates ranging from 10% to 37%, based on an investor's overall taxable income and filing status.

On the other hand, long-term capital gains from selling ETF shares held for more than a year are subject to preferential tax rates, providing incentives for investors to hold their ETF shares for longer periods to qualify for lower tax rates.

International taxpayers can refer to our helpful country guides for more details about regions outside the US.

Tax planning is essential for managing investments in Bitcoin ETFs effectively. Investors can adopt strategies such as holding ETF shares for more than a year to benefit from lower long-term capital gains tax rates and offsetting gains with losses from other investments through tax-loss harvesting.

Investing in tax-deferred accounts, such as retirement accounts, can also help defer taxes on ETF gains until withdrawals are made. By leveraging these strategies and seeking professional advice and services like ours TokenTax, investors can optimize their portfolios for better tax efficiency and financial outcomes.

Understanding the short- and long-term capital gains tax brackets for the 2024 tax year (due April 2025) is essential for US investors to calculate their tax liability on Bitcoin ETF gains. Tax brackets determine the percentage of an individual's income that goes towards taxes, with higher incomes generally taxed at higher rates. Short-term capital gains are taxed like, and as part of, ordinary income.

Short-term capital gains tax brackets (2024 tax year)

Long-term capital gains tax brackets (2024 tax year)

Reviewing these tax brackets can help investors estimate their crypto tax liability on Bitcoin ETF gains and plan their investment strategies accordingly. When in doubt, our team of crypto tax professionals at TokenTax is available to assist.

Bitcoin ETFs tax FAQs

How are crypto ETFs taxed?

Crypto ETFs are taxed based on their structure and the assets they hold. Spot crypto ETFs, holding actual cryptocurrency, are taxed similarly to direct holdings, with gains subject to capital gains tax. On the other hand, futures crypto ETFs follow the 60/40 rule, which can offer different tax treatment and potential benefits for investors.

Are Bitcoin ETF tax free?

Bitcoin ETFs are not tax-free. Like other investments, they are subject to capital gains tax on realized gains. However, strategic planning and understanding of tax rules can help investors minimize their tax burden while optimizing their returns.

How to avoid taxes on Bitcoin ETFs

While taxes on Bitcoin ETFs are inevitable upon selling ETF shares, investors can employ tax planning strategies to minimize their tax liability. These strategies may include holding ETF shares for more than a year to qualify for lower long-term capital gains tax rates, offsetting capital gains from Bitcoin ETFs with capital losses from other investments through tax loss harvesting, and taking advantage of tax-deferred accounts, such as retirement accounts, to invest in Bitcoin ETFs and defer taxes on gains until withdrawals are made.

What is a crypto or Bitcoin ETF?

A crypto or Bitcoin ETF is an exchange-traded fund that allows investors to gain exposure to cryptocurrencies, particularly Bitcoin, without directly holding the underlying assets. These ETFs track the performance of Bitcoin or other cryptocurrencies and are traded on stock exchanges, providing investors with a convenient and regulated way to invest in the cryptocurrency market.

What are the different types of ETFs?

There are several types of crypto ETFs, each catering to different investment objectives. The two main types of crypto ETFs are spot crypto ETFs and futures crypto ETFs. Spot crypto ETFs directly hold the underlying assets, reflecting the overall value of the ETF, while futures crypto ETFs engage in futures contracts to gain exposure to the asset's price movements. Investors can choose between spot and futures crypto ETFs based on investment goals, risk tolerance, and market outlook.