Please note that this translation may not capture the exact humor or writing style mentioned in the prompt.

Kindly be advised that this translation may not fully capture the intended wit or literary tone specified in the prompt.

Source: Grayscale; Compilation: Song Xue, LianGuai

• A recently published report inaccurately discussed the potential negative tax implications of cash redemptions (a concept applicable to mutual funds) for GBTC shareholders.

• Unlike mutual funds and many other ETFs, almost all physically-backed commodity ETFs (such as gold) are structured as granted trusts for tax purposes.

• Taxation of granted trusts differs from taxation of mutual funds, where capital gains or losses of the mutual fund may impact the remaining shareholders of the fund.

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• This means that physically-backed commodity ETFs structured as granted trusts, such as GBTC, are not disadvantaged compared to any other physically-backed commodity ETFs by the book value of the ETF assets, as mentioned below.

Recently, Bloomberg published an analysis titled “Bitcoin ETF: Creation and Redemption in Cash and Physical.” The article by ETF analyst James Seyffart states:

“If an ETF utilizes cash for creation and redemption, the fund must buy and sell assets (in this case, bitcoin), which incurs taxable events. This can complicate the process of converting GBTC to an ETF since it holds a sizable amount of bitcoin at a low cost, which would result in capital gains if sold in a pure cash mode, which is necessary when funds are flowing out.”

While the rest of this article is well thought out, the preceding statement further clarifies who would incur taxable events when cashing out GBTC. Grayscale is striving to correct this record on behalf of our investors.

1. What is the creation and redemption mechanism? Understanding the creation and redemption dynamics as a meeting of supply and demand is helpful: when there is investor demand, new ETF shares are created, and when supply exceeds investor demand, existing ETF shares are destroyed (or redeemed).

2. The investors purchasing ETF shares are different from the authorized participants (AP) participating in the share creation process, and likewise, the investors selling shares are different from the authorized participants participating in the share redemption process. Only broker-dealer firms that are registered with FINRA (called authorized participants) can transact on the primary market to create and redeem ETF shares. It is worth noting that non-AP shareholders (such as retail investors) do not have the ability to create or redeem ETF shares but can buy and sell ETF shares through brokerage accounts on the secondary market. The topic discussed in this article solely pertains to AP creation and redemption transactions on the primary market.

Now, to address the tax considerations mentioned in the Bloomberg article, the Grayscale team has carefully and thoroughly considered this issue:

3. The tax rules for granted trusts operating as ETFs are designed to ensure that the asset value recorded on the books of the ETF at the time of acquisition does not impact the tax liability of ETF investors. Technically, this is referred to as the “book value” of ETF assets.

4. Unlike mutual funds and many other ETFs, almost all physically-backed commodity ETFs are structured as grantor trusts for tax purposes. The tax treatment of grantor trusts is different from that of mutual funds, which may generate capital gains or losses based on the book value of the fund’s assets, thus affecting fund shareholders.

5. The tax consequences of asset sales for physically-backed commodity ETFs are determined based on the investors’ cost basis and the cash received, and are “not affected” by the book value of the trust assets. Additionally, cash redemptions of grantor trust units are only taxable events for redeeming shareholders, not for the ETF itself or non-redeeming shareholders.

6. Therefore, any physically-backed Bitcoin ETF that qualifies as a grantor trust is not at a disadvantage in terms of cash redemptions compared to any other physically-backed Bitcoin ETF based on the book value of the ETF’s assets.

While all of this may be quite technical, it is encouraging to see such detailed interest and involvement surrounding the discussions and mechanisms of physically-backed Bitcoin ETFs. At Grayscale, we are pleased to be a resource for anyone interested in learning more and delving deeper into these topics.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!