What are the conditions for investing in Hong Kong Bitcoin ETF? How will taxes be paid?

Written by: TaxDAO
Since the U.S. Securities and Exchange Commission approved the listing of the first 11 spot Bitcoin ETFs on January 10, the Hong Kong financial market has also made new progress in incorporating virtual assets. Recently, it was reported that the Hong Kong Securities and Futures Commission is accelerating the review of the first Hong Kong Bitcoin spot ETF and plans to list it on the Hong Kong Stock Exchange after the Spring Festival.
This article will analyze the regulatory policies of Hong Kong futures Bitcoin ETFs, the current status of existing virtual currency futures ETFs, and the tax policies of Hong Kong and Singapore for investing in Bitcoin futures ETFs. It will present the current development environment of Hong Kong Bitcoin ETFs from multiple perspectives, focus on Hong Kong’s attitude towards spot Bitcoin ETFs, and explore the future development trends of Hong Kong cryptocurrency ETFs.
1. Hong Kong Futures Bitcoin ETF Regulatory Policy
On October 31, 2022, the Hong Kong government issued a policy statement on the development of virtual assets in Hong Kong, clarifying the government's policy stance and guidelines for developing a vibrant virtual asset industry and ecosystem in Hong Kong. At the same time, the Hong Kong Securities and Futures Commission issued a circular on virtual asset futures exchange-traded funds (ETFs), considering the authorization of exchange-traded funds (ETFs) that are publicly offered in Hong Kong primarily through futures contracts. The "Circular on SFC-approved Funds Investing in Virtual Assets" issued on December 22, 2023 replaced and updated the "Circular on Virtual Asset Futures Exchange-Traded Funds". The document specifically clarifies the relevant requirements for public fund products with virtual assets accounting for more than 10% in terms of management companies, investment in virtual asset tokens, subscription and redemption of virtual assets, investment strategies, fund custody, spot virtual asset valuations, and service providers.
1.1 Conditions for Calling for Issuance
① Issuer qualifications: For companies that manage virtual asset funds (funds with virtual assets accounting for more than 10%), the management company must have a good compliance record and at least one employee of the company has experience in managing virtual assets or related products. The management company must meet the existing or new requirements of the licensing regulator for virtual asset management companies and must hold an upgraded No. 9 license. That is, the issuing company needs to meet the "Terms and Conditions for Licensed Issuers and Registered Institutions that Manage Investment Portfolios Invested in Virtual Assets".
② Custodian: In terms of custodians, virtual asset funds approved by the Hong Kong Securities and Futures Commission must use virtual asset platforms or financial institutions approved by the Hong Kong Securities and Futures Commission for virtual asset custody. The relevant virtual asset platforms or financial institutions must meet the requirements of the Hong Kong Monetary Authority for custodians. Similar to transactions, virtual assets require independent custody by a third party, and the custodian must be a licensed exchange in Hong Kong or a financial institution approved by the HKMA and its subsidiaries. In addition, the following conditions must be met:
Custody accounts must be separate from the asset management company’s own accounts;
Most of the assets are placed in cold wallets, and a small portion is placed in hot wallets for redemption;
Safekeeping of private keys requires that private keys must be kept in Hong Kong to effectively prevent external attacks and be properly backed up.
③ Service providers: In terms of service providers, the Hong Kong Securities and Futures Commission requires that virtual asset fund management companies should ensure that all necessary service providers (such as fund managers, market makers and index providers, etc.) must have the relevant qualifications of the Hong Kong Securities and Futures Commission regarding virtual asset fund operations and services.
④ Investment strategy requirements: In terms of futures investment, the Hong Kong Securities and Futures Commission pointed out that companies that manage virtual asset funds must ensure that the relevant virtual asset futures have sufficient liquidity. At the same time, the roll cost of the relevant virtual asset futures is controllable, and virtual asset fund companies should explain how to manage these roll costs. For funds that mainly adopt futures investment strategies, the Hong Kong Securities and Futures Commission stated that virtual asset funds authorized by the Securities and Futures Commission should adopt active investment strategies to make the investment portfolio flexible (such as diversified futures positions and multiple expiration dates), while having rollover strategies and the ability to respond to any market disruption events. At the same time, in terms of leveraged investment, the Hong Kong Securities and Futures Commission clearly pointed out that virtual asset funds authorized by the Securities and Futures Commission shall not leverage virtual assets at the fund level.
⑤ Valuation of virtual assets: In terms of the valuation of virtual assets, the Hong Kong Securities and Futures Commission pointed out that for the valuation of virtual assets, virtual asset fund management companies authorized by the Securities and Futures Commission should adopt trading methods based on major trading platforms (that is, benchmark indices published by reputable suppliers that can reflect a large share of underlying spot trading activities) for valuation.
⑥ Risk disclosure and investor education: The Circular requires issuers to disclose risks at all stages in issuance documents and financial reports, and also requires issuers and distributors to conduct investor education before launching products.
⑦ Audit system: According to the requirements of the Circular, funds that are preparing to issue or plan to invest 10% or more of the total asset value of the fund in virtual currencies must first seek the opinion of the Hong Kong Securities and Futures Commission and obtain approval.
1.2 Investor investment conditions
Currently, the Hong Kong government has legislated on cryptocurrency trading. Only exchanges with licenses granted by the Hong Kong Securities and Futures Commission can legally trade cryptocurrencies. Since ETFs are not considered direct purchases of virtual currencies, under Hong Kong's current laws, cryptocurrency ETFs are instead considered fund supervision. Therefore, as long as they are legally listed on the Hong Kong Securities and Futures Commission and the Hong Kong Stock Exchange, they can be purchased through legal channels.
As far as Hong Kong's current trading methods are concerned, anyone who buys an ETF needs to buy a certain minimum number of fund units, and different entry thresholds will result in different trading and costs. For example, the entry threshold for Samsung Bitcoin Futures Active ETF is 50 fund units, while that for CSOP Bitcoin Futures ETF (3066.HK) is 100 fund units. At the same time, there are investor restrictions in Hong Kong. According to the requirements of the Joint Circular, the sales of virtual asset-related products must comply with the requirements of the relevant jurisdictions, that is, virtual asset spot ETFs are prohibited from being sold to mainland Chinese investors. Virtual asset-related products are not offered or sold directly or indirectly to legal persons or natural persons in mainland China, or offered or sold for their benefit. Legal persons or natural persons in mainland China may not directly or indirectly purchase Bitcoin ETFs without first obtaining all necessary government approvals in mainland China.
2. Hong Kong’s existing futures Bitcoin ETF
HSBC Hong Kong has recently opened the following three ETFs, all of which have been approved for listing on the Hong Kong Stock Exchange: CSOP Bitcoin Futures ETF, CSOP Bitcoin Futures ETF, and Samsung Bitcoin Futures ETF.
2.1 CSOP Bitcoin Futures ETF
CSOP Bitcoin Futures ETF is a Bitcoin ETF and the first Bitcoin futures ETF in Hong Kong. Its investment tracking object is the Bitcoin futures contract on the Chicago Mercantile Exchange in the United States. The issuer is CSOP Asset Management Co., Ltd. It was listed on December 16, 2022, and the current minimum entry threshold is 100 fund units. Its asset size is USD 30.8 million as of February 1, 2024, with a share size of 13.89 million units and a net asset value of USD 2.2175 per unit. The management fee of CSOP Bitcoin Futures ETF (including trustee fees, custody fees and administrative fees) is 1.99% per year, and the annual recurring expense ratio is estimated to be 2.0%. The fund has risen by 131.00% since its inception, 62.08% in the past year, and 1.03% in the past month.
2.2 CSOP Ethereum Futures ETF
CSOP Ethereum Futures ETF is an Ethereum ETF. Its investment tracking object is the Ethereum futures contract on the Chicago Mercantile Exchange. The issuer is CSOP Asset Management Co., Ltd. It was listed on December 16, 2022. The current minimum entry threshold is 100 fund units. Its asset size is USD 12.09 million as of February 1, 2024, with a share size of 7.24 million and a net asset value of USD 1.6709 per unit. The management fee of CSOP Ethereum Futures ETF is 1.99% per year, and the annual recurring expense ratio is estimated to be 2.0%. The fund has risen by 71.07% since its issuance, 80.16% in the past year, and 11.29% in the past month.
2.3 Samsung Bitcoin Futures ETF
Samsung Bitcoin Futures ETF is a Bitcoin ETF. Its investment tracking object is the Bitcoin futures contract on the Chicago Mercantile Exchange in the United States. The issuer is Samsung Asset Management (Hong Kong) Co., Ltd. It was listed on January 13, 2023, and the current minimum entry threshold is 50 fund units. Its asset size is US$10.14 million as of February 1, 2024, with a share size of 4.75 million units and a net asset value of US$2.12 per unit. The management fee of CSOP Bitcoin Futures ETF is 0.89% per year, and the annual recurring expense ratio is estimated to be 2.0%. The fund has risen 96.70% since its issuance.
3. Tax treatment for Hong Kong and Singapore residents investing in Bitcoin ETFs
The taxation of Bitcoin ETFs at the lower level is roughly the same as other ETFs, involving capital gains tax, income tax, and withholding tax. The specific taxation is related to factors such as its registration location and type, the investor's residence, and the jurisdiction of the investment target. In the sale and redemption of ETFs, the sale is a capital gains tax event, while the redemption is not a taxable event and does not need to be taxed; at the same time, dividends from Bitcoin ETFs invested in other countries or regions will involve withholding tax.
3.1 Tax treatment for Hong Kong residents investing in futures Bitcoin ETFs
Hong Kong uses territorial jurisdiction as the basis for taxation, and only taxes profits and income from Hong Kong. At the same time, Hong Kong does not tax capital gains obtained by companies and individuals, but if the holding period is short, the capital gains from the sale of equity will be regarded as trading in nature, and thus subject to profit tax. Therefore, when Hong Kong residents obtain price difference income from the sale of Bitcoin ETFs, they are generally not subject to profit tax, and Hong Kong residents generally do not need to pay tax on Bitcoin ETF dividends received in Hong Kong.
Hong Kong companies are subject to profits tax on the price difference income obtained from the sale of Bitcoin ETFs. The profits tax rate for the first HK$2 million of investor corporations is 8.25%, and the taxable profits thereafter are 16.5%. For persons other than corporations in sole proprietorship or partnership businesses, the two-tier profits tax rates are 7.5% and 15% respectively. At the same time, corporate investors generally do not have to pay taxes on dividends received when investing in Bitcoin ETFs.
3.2 Tax treatment for Singapore residents investing in futures Bitcoin ETFs
Singapore and Hong Kong do not impose taxes on capital gains made by companies and individuals. However, for anti-tax avoidance purposes, if the holding period is short, the capital gains from the sale of equity will be taxed as business income, and no tax will be levied on the sale of equity if the holding period exceeds 20% and the holding period exceeds 24 months. At the same time, dividends paid by Hong Kong companies to non-residents are not subject to withholding tax, so Singapore residents or companies investing in Hong Kong Bitcoin ETFs do not need to deduct withholding tax on dividends and dividends.
At the investor level, Singapore also applies the territorial source principle, which only taxes income generated in or derived from Singapore. However, Singapore Income Tax Act stipulates that if income generated outside Singapore is remitted, transferred or brought into Singapore, it is also considered to be income "derived from Singapore".
Individual investors who remit the proceeds from investing in Hong Kong Bitcoin ETFs to Singapore generally have to pay personal income tax on the income. Singapore's personal income tax in 2024 ranges from 0% to 24%, depending on the individual's taxable income.
Singapore resident companies are exempt from tax on dividend income from foreign sources if: (1) when the foreign-source income is received in Singapore, the highest corporate tax rate (headline rate) in the foreign country where the income arises is at least 15%; (2) the income has already been taxed overseas; and (3) the authorities consider that the exemption will be beneficial to the resident company.
4. Spot Bitcoin ETF Dynamics
In 2022, Hong Kong approved futures-based cryptocurrency ETFs. Currently, there are three listed products: CSOP Bitcoin Futures, CSOP Ethereum Futures and Samsung Bitcoin Futures. Their asset sizes are relatively small, with each fund's AUM being less than US$100 million.
In December 2023, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a circular stating that they are ready to accept applications for the approval of virtual asset spot ETFs. This means that Hong Kong is becoming the first market in Asia to allow the listing of virtual asset spot ETFs.
On January 26, 2024, Harvest Fund Hong Kong has submitted a Bitcoin ETF application to the Hong Kong Securities and Futures Commission, becoming the first institution in Hong Kong to submit a Bitcoin spot ETF application. According to media reports, the Hong Kong Securities and Futures Commission hopes to speed up the approval of the first Hong Kong Bitcoin spot ETF, and plans to list the first Hong Kong spot Bitcoin ETF on the Hong Kong Stock Exchange after the Spring Festival. The Hong Kong Securities and Futures Commission may follow the practice of the United States, that is, to approve several applications at a time. So far, except for Harvest Fund, no other institution has submitted an application, although institutions including Southern East Investment have communicated with the Hong Kong Securities and Futures Commission many times, but have not yet submitted it.
With the continuous improvement of Bitcoin compliance and market maturity, the launch of Bitcoin spot ETF has achieved a close connection between the traditional financial market and the virtual asset market, marking the opening of the structured financial market to the virtual asset field and standardizing Bitcoin as a financial product in the form of spot ETF. Bitcoin spot ETF provides investors with a more convenient and standardized investment method, while improving the effective operation of the market and more effectively managing risks and protecting investors.