The Securities and Exchange Commission (SEC) has approved the first batch of exchange-traded funds (ETFs) based on Bitcoin to be listed in the US. This move not only gives US investors easier access but also stronger and regulated crypto market. But what does this mean for Indian investors? Is it possible to invest in a US Bitcoin ETF and what are the implications?
According to Vested Finance CEO Viram Shah, it presents Indian investors with a chance to add cryptocurrency to their portfolio via the Liberalised Remittance Scheme (LRS) route. Buying Bitcoin ETFs has its share of pros and cons, like any other asset class. Investing in a Bitcoin ETF lets Indian investors gain straightforward exposure via regulated organisations without having to concern themselves with the storage of the actual cryptocurrency.
Investments in the account are made by using the LRS of the Reserve Bank of India (RBI), which is available to all resident Indians. Through this scheme, an individual can remit up to $250,000 per financial year for such transactions.
One lingering question is whether buying overseas will incur a 1% TDS (tax deducted at source), as it does when buying crypto within India. Shah states that such a charge will not apply because no actual cryptocurrency is being purchased. The Securities and Exchange Commission has approved 11 applications, including from BlackRock, Ark Investments/21Shares , Fidelity, Invesco and VanEck. Just like your mutual fund holdings you won’t be investing directly in Bitcoin through these ETFs, explains Shah.
The question of the 20% TCS (tax collection at source) introduced in 2023 arises then. According to Shah, if deposits made through the Liberalised Remittance Scheme (LRS) exceed Rs 7 Lakhs, the TCS will apply. However, contrary to TDS, TCS can be set off against other tax liabilities, albeit it may lock up liquidity. Additionally, the expense of managing the ETF imposes an extra cost.
Also read: Bitcoin ETFs approved by US SEC. Here is what it means
How to buy US Bitcon ETF?
A brokerage account can be opened through an international or domestic brokerage such as Vested Finance or Winvesta. Opening an account requires identification and address proofs, and the entirely paperless process can be completed within minutes. Once your account is open, you need to fund it with foreign currency. Investments in the account are then made using LRS of RBI, under which as individual can remit up to $250,000 per financial year for such transactions.
However, any discussion on investing would be incomplete without considering costs. In contrast to local crypto exchanges where investments can be made after a brokerage fee of 0.5-2.5% is deducted, investing in a US Bitcoin ETF incurs several charges before the amount is invested. For instance, a foreign conversion fee of 1-1.5% and brokerage charges need to be accounted for. For example, in case of Vested Finance it is 0.20% subject to a maximum of $20. However, these charges vary from broker to broker. Another fee to anticipate includes a fee applied when withdrawing money from your account and forex inward charges of 0.5-1 per cent.
Tax Implications
Importantly , the tax implications must be noted. When you invest in US Bitcoin ETF long-term capital gains tax rate is 20% for investments held for over 36 months. If held for less than that time, short-term capital gains tax is applied as per your income tax slab. If you invest within India through domestic crypto exchanges, capital gains are taxed at 30%, as per the last budget.
The advantage of Bitcoin ETF is investing in the robust and regulated market. As in the past, numerous scandals have unfolded, and many have lost their funds either due to compromised wallets or sudden closures of companies. However, with ETFs now listed on tightly-regulated US stock exchanges, accessibility for retail investors can be facilitated through their existing brokerage accounts. These accounts are subject to close supervision, adding an extra layer of security to the investment process.