Why a C-Corp May Mean Tax Benefits for Crypto Futures ETF Investors
November 30, 2023
Read Time 5 MIN
Understand the Basics: C-Corp vs. RIC
Bitcoin and Ethereum are known not only for the dramatic price appreciation over their short history, but also for their volatility and wide price swings. Given these dynamics, investors need to pay particular attention to the tax implications. We believe comparing after-tax returns is crucial, as investors consider the Bitcoin and Ether futures ETFs now available in the market.
On an after-tax basis, a fund structured as a C-Corp may result in higher after-tax returns than funds structured as regulated investment companies (RICs). This is especially true for high-net-worth individuals and corporations investing over longer time horizons and through periods of high volatility. Tax exempt investors or individuals investing through tax deferred accounts are less likely to reap the benefits of a C-Corp structure.
With a C-Corp structure, a portion of the overall tax burden on income and gains is paid by the fund issuer and a portion is paid by the end investor outside of the fund. In a RIC structure, the entire tax burden on income and gains is paid by the end investor. Because of the relative corporate vs. individual tax rates and the tax loss carry-forward and carry-back provisions, the overall tax burden paid inside and outside of the C-Corp may be less than the overall tax burden paid outside the fund by the investor in a RIC structure. Additionally, for a longer-term investor, there is an opportunity to control the recognition of gains and potentially defer the payment of taxes with an investment in a C-Corp because the C-Corp is not required to distribute all of its gains each calendar year, while a RIC is required to do so in order to maintain its RIC status.
Think of C-Corp like Gardening in a Greenhouse
To help you understand the difference between investing in a C-Corp vs. a RIC, let’s think about gardening in a greenhouse vs. planting directly outside. Both gardens (portfolios) will result in a harvest (returns), but the size and nature of the harvest may differ.
Investing in a C-Corp is akin to cultivating a garden within a greenhouse. Within this controlled environment, plants are shielded from unpredictable weather (i.e., tax implications) with the aid of the greenhouse's climate control. On extremely hot or cold days, the temperature inside can be adjusted to protect the plants. Similarly, a C-Corp possesses the capability to carry forward and back capital losses, enabling it to offset potential gains.
This greenhouse allows gardeners to harvest a portion of their crops (distributions) at the end of each season and harvest the rest when they are ripe. Likewise, with a C-corp, investors can keep more of their money invested in the fund, as C-Corps are not required to distribute long-term capital gains to investors. C-Corp distributions are taxed at more favorable qualified dividend Income (QDI) rates, while RIC distributions are taxed at an investor’s ordinary income tax rate.
A garden planted directly outside without a greenhouse is like a RIC. While they might get sunlight directly and can still have fruitful crops, they are more exposed to the elements. They don’t have the flexibility of temperature control, and crops from the outdoor garden might need to be picked on a set schedule at the end of each season, which may not be the preference of all gardeners—or investors. However, a garden planted outside may have lower maintenance compared to a greenhouse garden, reflecting how a RIC can avoid paying taxes at the fund level whereas a C-Corp is required to pay taxes at the fund level.
Don’t Let Short-Term NAV Underperformance Concern You
C-Corps account for corporate taxes by accruing them on income and gains earned throughout the year. This tax accrual is reflected in the daily calculation of a fund’s Net Asset Value (NAV). In contrast, a RIC does not accrue taxes in its daily NAV. Consequently, in periods of rising markets, the NAV performance of a fund structured as a C-Corp may trail that of a RIC. The taxes accrued inside the fund for the C Corp structure will generally reduce the tax burden that investors pay outside the fund. Therefore, investors in the RIC structure will generally owe more taxes at the investor level than investors in the C Corp. For long-term, taxable investors in a C-Corp, the benefits of favorable tax treatment on distributions, coupled with the ability for loss carry-forwards and carry-backs, can result in increased tax efficiency and higher after-tax returns.
In short, while C-Corps may appear to lag behind RICs during rising markets due to the fund’s daily tax accrual, the long-term tax efficiency can offer better after-tax returns over time.
Benefits of a C-Corp Structure
- Potential for Better After-Tax Returns: For long-term, taxable investors, a C-Corp structure can potentially yield better after-tax returns compared to RICs.
- Flexible Handling of Losses: C-Corps can carry forward and carry back capital losses to offset gains and are not required to distribute long-term capital gains to investors, which may help investors reduce tax liability while keeping more money continually invested in the fund.
- Tax-Friendly Distributions: While distributions from RICs in this asset class are taxed at an individual’s ordinary income rate, C-Corp distributions are considered QDI and are taxed at long-term capital gains rates, which are currently lower than ordinary income tax rates. Additionally, for corporate investors, the distributions are eligible for the Dividends Received Deduction (DRD), which results in 50% of the dividends from the C-Corp being excluded from the taxable income of the corporate investor.
- Treatment of NAV: While in a rising market a C-Corp may appear to have lower returns because of the daily tax accrual, the long-term benefits of distributions that are taxed as QDI and DRD and the ability of the C Corp to utilize losses from one period to offset gains from another will generally result in higher after-tax returns for long-term investors.
- Simple Tax Reporting: No need to worry about complex tax documents. Both C-Corps and RICs report income to investors using Form 1099.
When considering Ethereum futures as an investment, it's essential to understand the tax implications. VanEck’s C-Corp structured fund, VanEck Ethereum Strategy ETF (EFUT), offers a unique approach that could be beneficial for many long-term, tax-sensitive investors. To read a more detailed analysis of the tax benefits offered by C-Corp, read Tax Basics of the C-Corp Structure.
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Important Disclosure
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The value of Ethereum (ETH) and Bitcoin (BTC) and the Funds’ Futures holdings, could decline rapidly, including to zero. You should be prepared to lose your entire investment. The Funds do not invest in BTC, ETH or other digital assets directly.
The further development and acceptance of digital asset networks, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate, the slowing, stopping or reversing of the development or acceptance of the digital asset networks may adversely affect the price of digital assets and therefore cause the Funds to suffer losses, regulatory changes or actions may alter the nature of an investment in digital assets or restrict the use of digital assets or the operations of the digital asset networks or venues on which digital assets trade in a manner that adversely affects the price of digital assets and, therefore, the Funds’ digital asset Futures. Digital assets generally operate without central authority (such as a bank) and are not backed by any government, digital assets are not legal tender and federal, state and/or foreign governments may restrict the use and exchange of digital assets, and regulation in the United States is still developing.
Futures Contract Risk. The use of futures contracts involves risks that are in addition to, and potentially greater than, the risks of investing directly in securities and other more traditional assets. The market for digital asset Futures may be less developed, and potentially less liquid and more volatile, than more established futures markets. Digital asset Futures are subject to collateral requirements and daily limits that may limit the Fund’s ability to achieve its target exposure. Margin requirements for digital asset Futures traded on the Chicago Mercantile Exchange (“CME”) may be substantially higher than margin requirements for many other types of futures contracts. Futures contracts exhibit “futures basis,” which refers to the difference between the current market value of the underlying digital asset (the “spot” price) and the price of the cash-settled futures contracts.
This risk may be adversely affected by “negative roll yields” in “contango” markets. The Funds will “roll” out of one futures contract as the expiration date approaches and into another futures contract on a digital asset with a later expiration date. The “rolling” feature creates the potential for a significant negative effect on the Fund’s performance that is independent of the performance of the spot prices of the digital asset. A market where futures prices are generally greater than spot prices is referred to as a “contango” market. Therefore, if the futures market for a given commodity is in contango, then the value of a futures contract on that commodity would tend to decline over time (assuming the spot price remains unchanged), because the higher futures price would fall as it converges to the lower spot price by expiration. Extended period of contango may cause significant and sustained losses.
An investment in the VanEck Ethereum Strategy ETF (EFUT) may be subject to risks which include, but are not limited to, risks related to market and volatility, investment (in ETH futures), ETH and ETH futures, futures contract, derivatives, counterparty, investment capacity, target exposure and rebalancing, borrowing and leverage, credit, interest rate, liquidity, investing in other investment companies, management, new fund, non-diversified, operational, portfolio turnover, regulatory, repurchase agreements, tax, cash transactions, authorized participant concentration, no guarantee of active trading market, trading issues, fund shares trading, premium/discount risk and liquidity of fund shares, U.S. government securities, debt securities, municipal securities, money market funds, securitized/mortgage- backed securities, sovereign bond, ETH-related company, ETH-related concentration, and equity securities risks, all of which could significantly and adversely affect the value of an investment in the Fund.
The Funds are classified for federal income tax purposes as taxable regular corporations or Subchapter “C” corporations. As “C” corporations, the Funds accrue a current and deferred tax expense. The deferred tax expense represents the future tax liability associated with the capital appreciation of its investments. The Funds’ accrued current and deferred tax liabilities, if any, will be reflected in their net assets value per share. An estimate of current and deferred income tax expenses/(benefit) is dependent upon the Funds’ net investment income/(loss) and realized and unrealized gains/(losses) on investments, and such expenses/(benefits) may vary greatly from year to year and from day to day depending on the performance of the Funds’ investments and general market conditions. Therefore, any estimate of current and deferred income tax expenses/(benefit) cannot be reliably predicted from year to year. Future actual income tax expense (if any) will be incurred over many years depending on if and when investment gains are realized, the then-current tax basis of assets and federal income tax rates, the level of net loss carryforwards and other factors. As such, current and deferred income taxes are not included in the total expense ratio, and the Funds’ actual total expense ratios may differ significantly.
VanEck Absolute Return Advisers Corporation is registered with the CFTC as both commodity pool operator and commodity trading advisor, and is a member of the National Futures Association. The Funds are speculative in nature and involve a high degree of risk. An investor may lose all or substantially all of an investment in the Funds. Commodity futures generally are volatile and the Funds may not be suitable for all investors.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck. com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.
Related Funds
Important Disclosure
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The value of Ethereum (ETH) and Bitcoin (BTC) and the Funds’ Futures holdings, could decline rapidly, including to zero. You should be prepared to lose your entire investment. The Funds do not invest in BTC, ETH or other digital assets directly.
The further development and acceptance of digital asset networks, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate, the slowing, stopping or reversing of the development or acceptance of the digital asset networks may adversely affect the price of digital assets and therefore cause the Funds to suffer losses, regulatory changes or actions may alter the nature of an investment in digital assets or restrict the use of digital assets or the operations of the digital asset networks or venues on which digital assets trade in a manner that adversely affects the price of digital assets and, therefore, the Funds’ digital asset Futures. Digital assets generally operate without central authority (such as a bank) and are not backed by any government, digital assets are not legal tender and federal, state and/or foreign governments may restrict the use and exchange of digital assets, and regulation in the United States is still developing.
Futures Contract Risk. The use of futures contracts involves risks that are in addition to, and potentially greater than, the risks of investing directly in securities and other more traditional assets. The market for digital asset Futures may be less developed, and potentially less liquid and more volatile, than more established futures markets. Digital asset Futures are subject to collateral requirements and daily limits that may limit the Fund’s ability to achieve its target exposure. Margin requirements for digital asset Futures traded on the Chicago Mercantile Exchange (“CME”) may be substantially higher than margin requirements for many other types of futures contracts. Futures contracts exhibit “futures basis,” which refers to the difference between the current market value of the underlying digital asset (the “spot” price) and the price of the cash-settled futures contracts.
This risk may be adversely affected by “negative roll yields” in “contango” markets. The Funds will “roll” out of one futures contract as the expiration date approaches and into another futures contract on a digital asset with a later expiration date. The “rolling” feature creates the potential for a significant negative effect on the Fund’s performance that is independent of the performance of the spot prices of the digital asset. A market where futures prices are generally greater than spot prices is referred to as a “contango” market. Therefore, if the futures market for a given commodity is in contango, then the value of a futures contract on that commodity would tend to decline over time (assuming the spot price remains unchanged), because the higher futures price would fall as it converges to the lower spot price by expiration. Extended period of contango may cause significant and sustained losses.
An investment in the VanEck Ethereum Strategy ETF (EFUT) may be subject to risks which include, but are not limited to, risks related to market and volatility, investment (in ETH futures), ETH and ETH futures, futures contract, derivatives, counterparty, investment capacity, target exposure and rebalancing, borrowing and leverage, credit, interest rate, liquidity, investing in other investment companies, management, new fund, non-diversified, operational, portfolio turnover, regulatory, repurchase agreements, tax, cash transactions, authorized participant concentration, no guarantee of active trading market, trading issues, fund shares trading, premium/discount risk and liquidity of fund shares, U.S. government securities, debt securities, municipal securities, money market funds, securitized/mortgage- backed securities, sovereign bond, ETH-related company, ETH-related concentration, and equity securities risks, all of which could significantly and adversely affect the value of an investment in the Fund.
The Funds are classified for federal income tax purposes as taxable regular corporations or Subchapter “C” corporations. As “C” corporations, the Funds accrue a current and deferred tax expense. The deferred tax expense represents the future tax liability associated with the capital appreciation of its investments. The Funds’ accrued current and deferred tax liabilities, if any, will be reflected in their net assets value per share. An estimate of current and deferred income tax expenses/(benefit) is dependent upon the Funds’ net investment income/(loss) and realized and unrealized gains/(losses) on investments, and such expenses/(benefits) may vary greatly from year to year and from day to day depending on the performance of the Funds’ investments and general market conditions. Therefore, any estimate of current and deferred income tax expenses/(benefit) cannot be reliably predicted from year to year. Future actual income tax expense (if any) will be incurred over many years depending on if and when investment gains are realized, the then-current tax basis of assets and federal income tax rates, the level of net loss carryforwards and other factors. As such, current and deferred income taxes are not included in the total expense ratio, and the Funds’ actual total expense ratios may differ significantly.
VanEck Absolute Return Advisers Corporation is registered with the CFTC as both commodity pool operator and commodity trading advisor, and is a member of the National Futures Association. The Funds are speculative in nature and involve a high degree of risk. An investor may lose all or substantially all of an investment in the Funds. Commodity futures generally are volatile and the Funds may not be suitable for all investors.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck. com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.