The SEC extended its consideration of a proposed rule change to list and trade shares of ARK 21Shares Bitcoin Exchange-Traded Fund ("ETF") on the Cboe Exchange, Inc. The date to approve or disapprove the proposed rule was extended to April 3, 2022.
The SEC also extended its consideration of a proposed rule change to list and trade shares of Teucrium Bitcoin Futures Fund on the NYSE Arca Exchange. The date to approve or disapprove the proposed rule was extended to April 8, 2022.
The SEC is assessing whether the exchanges (i) have a comprehensive surveillance-sharing agreement with a significant, regulated market and (ii) can effectively prevent fraudulent and manipulative activity. In similar proposals, the SEC previously expressed concern over the ability of exchanges to adequately meet the requirements under Exchange Act Section 6(b)(5) ("National Securities Exchange Registration Determination") in protecting investors and the public interest by preventing fraudulent and manipulative practices.
Commentary
With the emergence of crypto and crypto futures ETFs, there is a growing need for answers to the nuanced and debated questions about the tax status of crypto and crypto derivatives. What virtual currency is for tax bears directly on whether a crypto or crypto derivatives investment vehicle (like an ETF) would be subject to direct corporate taxation.
For example, Teucrium Bitcoin Futures Fund, whose approval decision was recently delayed by the SEC, is taking the position that it will not attract corporate level tax because the crypto futures it trades in will be treated by the IRS as "commodities futures" that generate "qualifying income" under Section 7704(d), excepting certain publicly traded partnerships ("PTP") from corporate taxation. Teucrium is a statutory trust that will be treated as a partnership. To avoid being treated as a PTP taxable as a corporation, Teucrium is betting that Bitcoin futures will be "commodities futures" aiming to meet the "qualifying income" test under Section 7704(d). This is the same approach that the Proshares Bitcoin ETF, which was approved by the SEC in October 2021, took.
The ARK21 Shares Bitcoin ETF, which holds Bitcoin directly, is taking a different approach, by treating itself as a "grantor trust," which is not subject to corporate level tax. This approach depends on treating each unit of Bitcoin as fungible, and prohibiting the ETF from trading in and out of Bitcoin. In the case of ARK21, shareholders will be treated as if they own a pro rata share of the underlying Bitcoin held in the ETF.
The uncertain tax status of crypto and crypto derivatives introduces tax risk that generally does not exist for investment vehicles that hold or trade more traditional financial assets.
Cadwalader's Erin Stidham contributed to this comment.
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