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) of the U.S. Internal Revenue Code.

Investors incur capital gains tax liabilities in two ways: annual distributions and asset sales

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.

RESOURCES

Unplugging Heartbeat Trades and Reforming the Taxation of ETFs

State Street: ETFs and tax efficiency

The Role of Taxes in the Rise of ETFs