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TAX CLINIC

which are regulated by the SEC. shareholders. Taxpayers who own sales, taxpayers inadvertently could fail
Specifically, shares of these trusts are shares of these trusts may therefore be to report the yearly sales made to pay
registered pursuant to Section 12(g) of unaware of the realized gains and losses the sponsor fees, opening them up to
the Securities Exchange Act of 1934. that are incurred when the sponsors the possibility of audit or adjustment
These trusts, all of which are sell portions of these holdings to pay for every year they did not account
currently offered through the New for yearly trust expenses, and they may for them. Such an accuracy-related
York City–based firm Grayscale be even less aware of the ramifications audit could easily be triggered when a
Investments LLC, periodically sell a of these sales as they relate to their taxpayer finally sells shares of the trust
limited number of private shares to overall basis. and accounts for a gain or loss on their
investors who must meet strict income, personal taxes.
net-worth, and experience requirements Investment trust basis and yearly Just as the IRS issued a summons
and who, later on, may sell their shares expenses to Coinbase Inc. (see Coinbase Inc.,
through public markets themselves. Yet, Determining the basis of an investor’s No. 17-cv-01431-JSC (N.D. Cal.
because they are not securities, based share in a virtual currency investment 11/28/17)), pursuant to Sec. 7602(a),
on the nature of their underlying assets, trust is necessary not only for the in order to investigate virtual currency
these offerings have been organized eventual disposition of a taxpayer’s compliance through that exchange, it is
as investment trusts pursuant to Regs. position but is also required to account entirely possible that Grayscale could
Sec. 301.7701-4(c), owing to the fact for yearly sponsor fees. These fees are one day be issued a similar summons,
that they include only a single class a small percentage of the aggregate exposing information about private
of ownership interest, they represent value of the trust’s assets, paid out by investors who participated in its initial
an undivided beneficial interest in the trust and accrued monthly. The offerings in the process. While current
the underlying assets of the trust, only assets these trusts have are the holders in these trusts who have not yet
and there is no power under the trust underlying cryptoassets themselves, sold any shares may have had little to
agreement to vary the investment of the so the only means of paying these worry about in the past, beginning in
certificate holders. sponsor fees is by selling small lots of 2021, even the purchase or acquisition
From a tax-reporting perspective, the cryptoassets held in trust. Since of cryptoassets must be reported on
these trusts are nearly identical to these sales are relatively small (de an individual’s tax return. Once again,
exchange-traded commodity funds, minimis) and are not distributions to with the treatment of shares of virtual
such as SPDR Gold Shares (GLD) shareholders, neither the trust nor the currency investment trusts translating
or iShares Gold Trust (IAU), lacking brokers are required to report the gross to ownership of the underlying assets,
only the recognition as securities. The proceeds of the sales to shareholders on investors in these trusts who fail to
IRS has previously issued guidance Form 1099-B, Proceeds From Broker and report their purchases may be deemed
on how taxpayers are to account for Barter Exchange Transactions, according to have filed an inaccurate return.
transactions involving shares of these to Regs. Sec. 1.671-5(c)(2)(iv)(B). Even though these trusts may not
commodity funds. Under Notice 2014-21, the sales of report Forms 1099-B to the IRS on
In the case of precious-metal virtual currency to pay the sponsor fees, the shareholders’ behalf, Grayscale
ETF shares, each share is physically however, must still be treated as sales does provide trust tax information
backed by the underlying metal, thus of capital assets that result in capital to facilitate year-end reporting of
each share represents ownership of an gains or losses for the owners of the investors’ taxable positions. Once again,
underlying commodity. Grayscale’s underlying cryptocurrencies. By way these trusts follow very closely the
virtual currency grantor trusts feature of comparison, when an investor in a precedent set by commodity ETFs in
shares that are likewise backed by physically backed metal ETF treated that they include a gross proceeds file,
underlying cryptocurrencies held in as a trust sells or redeems an interest which transcribes per share expenses
trust by the sponsor and therefore in that ETF, the sale or redemption and purchases similar to reporting
constitute ownership on the part of the is treated as a sale of the investor’s statements issued by metal-backed
shareholder. This indirect ownership, proportionate share of the metal held ETFs such as SPDR Gold Trust (see
in turn, attaches federal income tax by the physically backed metal ETF SPDR Gold Trust 2020 Grantor Trust
reporting requirements to transactions (IRS Program Manager Technical Tax Reporting Statement).
involving the totality of currencies Advice 2008-01809 (5/2/08)). Because The following example, based on
owned by the trust but apportioned a virtual currency investment trust does one in Grayscale Bitcoin Trust’s 2020
at a pro rata share to individual not issue a Form 1099-B for these tax information letter, demonstrates the

12 September 2022 The Tax Adviser