ETF Investment Topic (3): Australian Bitcoin ETF Dynamics, How Will Investors Pay Taxes?

The U.S. Securities and Exchange Commission approved the listing of the first batch of 11 spot bitcoin ETFs on January 10, and the Hong Kong Securities and Futures Commission is also speeding up the review of the first Hong Kong spot bitcoin ETF. Australian interest in bitcoin ETFs surged after US approval of bitcoin spot ETFs, and the Australian Securities Exchange (ASX) is expected to approve its first bitcoin ETF soon. This article will start from the current trading status of Bitcoin ETFs in Australia, analyze the tax policy of Bitcoin ETFs in Australia, analyze the latest developments of spot Bitcoin ETFs in Australia, and predict their future development trends.

[if !supportLists]1. [endif]Australian Bitcoin ETF tax policy

Bitcoin ETFs are taxed in the lower tier in much the same way as other ETFs, involving capital gains tax, income tax, withholding tax, etc., and the specific taxation is related to factors such as the place and type of registration, the investor's place of residence, and the jurisdiction where the investment target is located. In the sale and redemption of ETFs, the sale is a capital gains tax event, while the redemption is not a taxable event and is not taxable.

In Australia, when an individual investor invests in a Bitcoin ETF and receives capital gains from the sale or dividends, they are subject to the same tax rules as general assets such as stocks and are subject to capital gains tax. Capital gains tax is not a stand-alone tax, but a type of personal income tax, which has different standards depending on the person. Resident individuals in Australia pay an excess progressive tax rate of 19%-45%, with residents with a gross annual income of less than $18,200 exempt from personal income tax. At the same time, Australian investors may receive a 50% reduction in long-term capital gains if they hold cryptocurrencies for more than a year before selling or trading the Bitcoin ETF.

In general, capital gains from the sale of Australian taxable property by Australian resident enterprises are taxed at a rate of 30%, and small businesses with accumulated annual business income of up to AUD50 million are taxed at 25%. Therefore, the capital income obtained by enterprises investing in Bitcoin ETFs and selling them for profit also needs to pay capital gains tax at a rate of 30% or 25%, and unlike individuals, Australia provides a series of exemptions for enterprises, such as personnel costs, office costs, annual profits and other aspects, depending on the actual situation of the enterprise. At the same time, both individuals and businesses need to declare and pay taxes on their annual tax returns. If the capital gains tax exceeds $50,000, it will need to be paid in advance.

In Australia, dividends distributed by an ETF to non-resident businesses or individual investors are subject to a withholding tax of 30% of the total amount. But Bitcoin ETFs don't involve dividends, so there's usually no need to deal with such issues.

[if !supportLists]2. [endif]Tax treatment of Hong Kong and Singapore residents investing in Australian Bitcoin ETFs

[if !supportLists]2.1 [endif]Tax treatment of Hong Kong residents investing in Australian futures bitcoin ETFs

Hong Kong imposes income tax (profits tax) on the spread income earned by investors through the sale of Bitcoin ETFs. The profits tax rate for the first HK$2 million of the corporation is 8.25% and the assessable profits thereafter are 16.5%. For persons not covered by a sole proprietorship or partnership, the two-tiered profits tax rates are 7.5% and 15% respectively. Investors who receive dividends in Hong Kong are generally not subject to tax. Dividends received by shareholders from corporations subject to Hong Kong profits tax are exempt from tax, and dividends or gains derived from overseas are not subject to tax if they are derived from sources outside Hong Kong.

Since there is no Double Taxation Agreement (DTA) between Hong Kong and Australia, and Australian resident companies must levy withholding tax when they pay interest, dividends, etc. to non-residents, Hong Kong investors will pay withholding tax at a rate of 30% when investing in regular Australian ETFs, while Bitcoin ETFs usually do not involve withholding tax.

Unlike investing in a US ETF, if a capital gain is generated from the sale of an Australian Bitcoin ETF, it is usually required to file and pay capital gains tax in Australia, which is generally 10% for foreign investors.

[if !supportLists]2.2 [endif]Tax treatment of Singapore residents investing in Australian futures bitcoin ETFs

There is no tax on capital gains made by companies and individuals. However, for anti-avoidance reasons, if the shareholding period is short, the capital gain from the sale of the equity will be taxed as business income. There is no tax on the gain on the sale of shares held for more than 20% and for a period of more than 24 months.

Singaporean investors are subject to withholding tax when investing in ETF funds in other countries or regions. Due to Singapore's DTA agreement with Australia, which limits the rate of withholding tax on Australia to a maximum of 15%, investors from Singapore are required to pay a withholding tax of 15% when they receive dividends from general Australian ETFs (Bitcoin ETFs do not generate dividends, so there is no such problem).

Similarly, if a capital gain is generated from the sale of an Australian Bitcoin ETF, it is usually required to file and pay capital gains tax in Australia, which is generally 10% for foreign investors.

At the investor level, Singapore implements a territoriality principle and only taxes income generated in or sourced in Singapore. However, the Singapore Income Tax Act provides that income generated outside Singapore is also considered to be "Singapore-sourced" if it is remitted, transmitted or brought into Singapore.

Individual investors who remit their income from investing in Bitcoin ETFs into Singapore are generally subject to personal income tax on that income. Singapore's personal income tax in 2024 ranges from 0% to 24%, depending on the individual's taxable income.

A Singapore resident business is exempt from tax on dividend income from overseas sources if (1) the highest corporate tax rate (headline rate) of the overseas country where the income is generated is at least 15% when the overseas income is received in Singapore;( 2) the income has been taxed overseas, and (3) the exemption is considered to be beneficial to the resident company.

With the adjustment of Singapore's tax laws, proceeds from the sale of foreign assets may be subject to tax on remittance to Singapore under certain conditions from 1 January 2024, reflecting Singapore's gradual alignment with international tax standards. However, for Bitcoin ETF investment income, investors will generally only be liable for Australian withholding tax obligations if the income is not remitted to Singapore.

[if !supportLists]3. [endif]Australian Spot ETF Update: Will ASX approve spot Bitcoin ETFs?

There are currently several spot Bitcoin ETFs in Australia, including the first Bitcoin ETF in Australia issued by Cosmos Asset Management in 2022, and the Cosmos Bitcoin ETF provides indirect exposure to spot investments in Bitcoin through Canada's Purpose Bitcoin ETF. At the same time, Canada-based 3iQ Digital Asset Management launched a spot ETF, the 3iQ CoinShares Bitcoin (BTC) Feeder ETF, an Australian ETF that draws money from Canadian ETFs listed on the Toronto Stock Exchange, with the underlying asset being Bitcoin held in cold equipment on the Gemini cryptocurrency exchange. The funds were held in custody of Chi-X, Australia's second-largest market, rather than the ASX, as there were still some regulatory difficulties with ASX-listed blockchain and cryptocurrency-related stocks at the time.

The U.S. Securities and Exchange Commission's approval of spot bitcoin ETFs sparked a wave of cryptocurrency development in Australia and Asia, surging demand for cryptocurrencies and their associated assets, while helping to drive the approval of bitcoin spot ETFs. Following the "customs clearance" of the first batch of Bitcoin spot ETFs in the United States, financial institutions in Hong Kong, China are also accelerating the layout of virtual asset spot ETFs, Harvest Fund Hong Kong has submitted a Bitcoin ETF application to the Hong Kong Securities and Futures Commission, becoming the first institution in Hong Kong to submit an application for a Bitcoin spot ETF, while the Hong Kong Securities and Futures Commission wants to speed up the approval of the first Hong Kong Bitcoin spot ETF in line with its ambition to become a cryptocurrency hub, and Hong Kong Legislative Council member Johnny Ng has been actively advocating for these developments.

The Australian Securities Exchange (ASX) is also ramping up its Bitcoin ETF portfolio, with the ASX expected to approve its first spot Bitcoin ETF ahead of the Hong Kong authorities. Previously, Monochrome Asset Management had submitted an application to the ASX in July 2023 for a spot bitcoin ETF, which provides exposure to spot crypto assets, providing retail investors with the opportunity to invest directly in bitcoin, bridging the gap between the traditional financial market and the world of digital assets, which is eagerly awaited by the majority of investors.