Apparently, even cypherpunks hate paying taxes.
So-called 351 exchanges are all the rage with wealthy investors who want to transfer assets between holdings in their portfolios without triggering capital gains taxes. They also let investors with heavily concentrated stock positions convert them into a diversified exchange-traded fund. But what about cryptocurrencies, like bitcoin? Some experts are working on new strategies that, one day, may allow digital assets to be converted into indexed products without the immediate tax implications.
“[Some investors] were early on in the crypto space, and it’s now highly appreciated for them,” said Matt Bucklin, founder of ExchangiFi, an educational platform for 351 exchange investors. “They don’t want to sell it because you do have to pay capital gains on it. This would just be a way of them diversifying out of their bitcoin.”
SUBSCRIBE: Receive more of our free ETF Upside newsletter. READ ALSO: BlackRock’s ‘Unusual’ Acquisition of CornerCap’s ETF and Sustainable Investor Impax Adds First ETF
The reason 351 exchanges exist is because nearly all ETFs are considered Registered Investment Companies by ETF Rule 6c-11, Bucklin said. But they have to meet certain diversification requirements, meaning no more than 25% of their income can come from commodities, including bitcoin. The way around this, he said, is by seeding the digital assets into a company called a digital asset treasury (DAT) and converting the DAT’s stocks into an ETF using a traditional 351 exchange. (We said it was complicated in the headline.)
Basically, the process is twofold:
-
First, the investor contributes their cryptocurrency into a newly created digital asset treasury.
-
Then, stocks in the digital treasury can be converted into a diversified ETF.
Don’t Have a Meltdown Now. Bucklin said Strive Asset Management is one of the first to attempt the process, creating a digital treasury last year, the first publicly traded bitcoin asset management company. But no one has yet completed both steps, he said. The main hurdle now is forming the initial treasury. Oh, and the fact that crypto has been on a major slide in recent months. “Treasury companies are all now trading below their net asset value,” Bucklin added. “So the other problem is that crypto is melting down.”
This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.
