ETF Investment Topic (2): What are the requirements for investing in Hong Kong Bitcoin ETF? How will taxes be paid?

Since the U.S. Securities and Exchange Commission (SEC) approved the listing of the first 11 spot Bitcoin ETFs on January 10th, there has been new progress in the Hong Kong financial market's inclusion of virtual assets. On Monday, April 15th, it was publicly disclosed that the Hong Kong subsidiaries of mainland public funds, including Bosera International, China AMC Fund (Hong Kong), and Harvest Global Investments, have obtained the Hong Kong Securities and Futures Commission's (SFC) approval in principle for the issuance of virtual asset spot ETF products. It is reported that after being approved for this business, the managers can provide virtual asset management services to investors and apply to the regulator for the issuance of ETF products that can invest in spot Bitcoin and spot Ethereum. Ordinary investors can subscribe to related products through the Hong Kong Stock Exchange.

Previously, TaxDAO has written an analysis of the tax issues related to the Hong Kong Bitcoin ETF. This article organizes and reiterates the corresponding key points.

1. Conditions for Investor Investment

Currently, the Hong Kong government has legislated on cryptocurrency trading, and only exchanges with a license issued by the Hong Kong Securities and Futures Commission (SFC) in Hong Kong can legally trade cryptocurrencies. Since an ETF is not considered a direct purchase of virtual currency, under the current laws in Hong Kong, cryptocurrency ETFs are instead regarded as fund supervision. Therefore, as long as the cryptocurrency ETFs are legally listed on the Hong Kong SFC and the Stock Exchange of Hong Kong (SEHK), they can be purchased through legal channels.

In terms of the current trading methods in Hong Kong, anyone purchasing an ETF needs to buy a specific minimum number of fund units, and different entry thresholds will result in different trading and costs. For example, the entry threshold for Samsung Bitcoin Futures Active ETF is 50 fund units, while the entry threshold for the Southern East Bitcoin Futures ETF (3066.HK) is 100 fund units. At the same time, there are investor restrictions in Hong Kong. According to the "Joint Circular" requirements, the sale of products related to virtual assets must comply with the requirements of the relevant jurisdiction, that is, virtual asset spot ETFs are prohibited from being sold to investors from Mainland China. Products related to virtual assets are not directly or indirectly sold, offered for sale, or offered for sale for the benefit of legal persons or natural persons from Mainland China in Mainland China. Legal persons or natural persons from Mainland China are not allowed to directly or indirectly purchase Bitcoin ETFs without first obtaining all the necessary government approvals from Mainland China.

2. Tax Treatment for Hong Kong and Singapore Residents Investing in Bitcoin ETFs

The underlying tax of a Bitcoin ETF is generally the same as other ETFs, involving capital gains tax, income tax, and withholding tax. In the sale and redemption of ETFs, the sale constitutes a capital gains tax event, while redemption does not constitute a taxable event and no tax is required to be paid; at the same time, dividends obtained from investing in ETFs in other countries and regions will involve withholding tax.

It should be pointed out that Bitcoin ETF products do not provide dividends and distributions because they track the price of Bitcoin, not traditional company stocks. In Hong Kong, investors in Bitcoin ETFs generally do not need to pay capital gains tax on the difference income obtained through the sale of ETFs. However, the specific tax situation may vary depending on factors such as the investor's place of residence, the jurisdiction where the investment target is located, and the duration of the investment.

2.1 Tax Treatment for Hong Kong Residents Investing in Hong Kong Bitcoin ETFs

According to Hong Kong's tax system, the region implements the principle of territorial source, that is, only profits and income generated or sourced in Hong Kong are taxed. Under normal circumstances, individuals and companies in Hong Kong do not need to pay tax on capital gains, that is, the profits obtained through investing in Bitcoin ETFs are not subject to capital gains tax.

Regarding the determination of "capital gains," the Hong Kong authorities stipulate that gains from the sale of investment securities held for long-term investment purposes have a capital nature; gains generated for short-term trading purposes may be of a trading nature, and income of a trading nature should be taxed. Therefore, if an investor's trading behavior is frequent and the holding period is short, the difference income obtained from frequent trading of Bitcoin ETFs may be defined as income of a trading nature, and in this case, it may be necessary to pay Hong Kong profit tax (i.e., the general concept of income tax). In other words, as long as Hong Kong residents, whether individuals or businesses, do not obtain profits through frequent trading of Bitcoin ETFs, they generally do not need to pay taxes for such profits.

2.2 Tax Treatment for Singapore Residents Investing in Hong Kong Bitcoin ETFs

Singapore generally does not tax capital gains earned by individuals and companies. However, similar to Hong Kong, to avoid tax evasion, if the investment period is short and the trading is frequent, then the income obtained from selling securities, equity may be considered as business income and thus be subject to tax.

At the investor level, Singapore also implements the principle of territorial source, only taxing income generated or sourced in Singapore. Individuals and companies generally do not need to pay tax on capital gains.

Specifically, in the case of investing in Hong Kong Bitcoin ETFs, for individual investors from Singapore, the income obtained from investing in Hong Kong Bitcoin ETFs is taxed in Hong Kong according to Hong Kong's regulations (generally not taxed), and after the capital gains are remitted to Singapore, they are generally not subject to tax according to Singaporean tax law.

For corporate investors, the Ministry of Finance of Singapore proposed the Income Tax (Amendment) Bill No. /2023 in 2023, which added a new item 10L updating the rules for tax exemption on foreign income. This rule stipulates that the gains obtained by enterprises from disposing of "foreign assets" (i.e., any rights or interests located outside of Singapore) after January 1, 2024, will be considered as taxable income under paragraph (1)(g) of Article 10 of the Income Tax Act for the relevant year of assessment. This means that Singaporean companies investing in Hong Kong Bitcoin ETFs will bear the corresponding income tax obligations and should declare and pay taxes in accordance with the relevant regulations of the Singaporean authorities.

Additionally, for ordinary ETFs, dividend income obtained from overseas sources by Singaporean resident companies can be tax-exempt if the following conditions are met: (1) when the overseas-sourced income is received in Singapore, the highest corporate tax rate (nominal rate) in the overseas country is at least 15%; (2) the income has been taxed overseas; (3) the authorities consider it beneficial for the resident company to be exempt from tax.