# Taxes

The growing popularity of Exchange-Traded Funds (ETFs) among long-term investors is, to a large extent, driven by their fee and tax efficiencies. Leveraging their unique security design, ETFs achieve their tax efficiency through the in-kind redemption process and the use of heartbeat trades, by offloading low-basis stocks without triggering a taxable event, pursuant to the exemption provided by [Section 852(b)(6)](https://www.law.cornell.edu/uscode/text/26/852) of the U.S. Internal Revenue Code.

Investors incur capital gains tax liabilities in two ways: <mark style="color:red;">annual distributions and asset sales</mark>

#### Example: Capital gains

1. Hans buys BTC for $1,000.
2. Later, he trades/swaps/sells his BTC for $1,200 USDC.
3. Hans incurs $200 of capital gain.

### XFT's Multiplier & Tax Drag

If `RewardMultiplier(uint256 indexed value)` = 1, then no unit/token price appreciation/depreciation or no capital gain.&#x20;

RESOURCES

[Unplugging Heartbeat Trades and Reforming the Taxation of ETFs](https://businesslawreview.uchicago.edu/print-archive/unplugging-heartbeat-trades-and-reforming-taxation-etfs)

[State Street: ETFs and tax efficiency](https://www.ssga.com/us/en/intermediary/resources/education/etfs-and-tax-efficiency-what-you-need-to-know)

[The Role of Taxes in the Rise of ETFs](https://corpgov.law.harvard.edu/2025/05/22/the-role-of-taxes-in-the-rise-of-etfs/)


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