What are the requirements for investing in Hong Kong Bitcoin ETFs, and how will they be taxed?
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What are the requirements for investing in Hong Kong Bitcoin ETFs, and how will they be taxed?
This article will analyze Hong Kong's regulatory policies on bitcoin futures ETFs, the current status of existing cryptocurrency futures ETFs, and the tax policies regarding investment in bitcoin futures ETFs in Hong Kong and Singapore.
Navigating Web3 tides with focused insightsBy TaxDAO
Following the U.S. Securities and Exchange Commission's approval of the first 11 spot Bitcoin ETFs on January 10, Hong Kong’s financial market has also made progress in incorporating virtual assets. Recent reports indicate that the Securities and Futures Commission (SFC) of Hong Kong is accelerating its review of the first Hong Kong spot Bitcoin ETF, with plans to list it on the Hong Kong Stock Exchange after the Lunar New Year.
This article analyzes Hong Kong's regulatory policies for Bitcoin futures ETFs, the current status of existing cryptocurrency futures ETFs, and tax policies in Hong Kong and Singapore regarding investments in Bitcoin futures ETFs. It presents a comprehensive view of the current development environment for Bitcoin ETFs in Hong Kong, examines Hong Kong’s stance toward spot Bitcoin ETFs, and explores future trends for cryptocurrency ETFs in the region.
1. Regulatory Policy for Bitcoin Futures ETFs in Hong Kong
On October 31, 2022, the Hong Kong government issued a policy statement on the development of virtual assets in Hong Kong, outlining its policy position and direction for fostering a vibrant virtual asset industry and ecosystem. At the same time, the SFC released a circular on virtual asset futures exchange-traded funds (ETFs), considering authorization requirements for ETFs primarily investing in futures contracts and offered publicly in Hong Kong. The "Circular on SFC-Authorized Funds Investing in Virtual Assets," published on December 22, 2023, replaced and updated the previous "Circular on Virtual Asset Futures Exchange-Traded Funds." This document specifically clarifies requirements related to management companies, investment in virtual asset tokens, subscription and redemption processes, investment strategies, custody, valuation of spot virtual assets, and service providers for public fund products where virtual assets account for more than 10% of total assets.
1.1 Conditions for Fund Issuance
① Issuer Qualifications: For companies managing virtual asset funds (where virtual assets exceed 10% of fund assets), the management company must have a strong compliance record, with at least one employee possessing experience in managing virtual assets or related products. The management company must meet existing or new requirements set by licensing regulators for virtual asset managers and hold an upgraded Type 9 license. That is, the issuing company must satisfy the "Terms and Conditions Applicable to Licensed Corporations and Registered Institutions Managing Portfolios Investing in Virtual Assets."
② Custodian Institutions: SFC-authorized virtual asset funds in Hong Kong must use SFC-approved virtual asset platforms or financial institutions for custody of virtual assets. These platforms or financial institutions must meet the custody requirements set by the Hong Kong Monetary Authority (HKMA). Similar to trading, virtual assets must be held in third-party independent custody, and custodians must be licensed exchanges in Hong Kong or HKMA-recognized financial institutions and their subsidiaries. Additional requirements include:
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Custody accounts must be segregated from the asset manager’s own accounts;
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The majority of assets must be stored in cold wallets, with only a small portion in hot wallets for subscriptions and redemptions;
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Private keys must be securely stored within Hong Kong, protected against external attacks, and properly backed up.
③ Service Providers: The SFC requires that virtual asset fund management companies ensure all necessary service providers—such as fund managers, market makers, and index providers—possess qualifications relevant to operating and servicing virtual asset funds as stipulated by the SFC.
④ Investment Strategy Requirements: Regarding futures investments, the SFC states that fund managers must ensure the underlying virtual asset futures have sufficient liquidity. Additionally, the roll cost of these futures must be controllable, and fund managers should clearly articulate their approach to managing such costs. For funds primarily using futures-based investment strategies, the SFC emphasizes that authorized funds should adopt active investment strategies to provide portfolio flexibility (e.g., diversified futures positions, multiple expiration dates), possess roll-over strategies, and be capable of responding to any market disruptions. Furthermore, the SFC explicitly prohibits leveraged investment in virtual assets at the fund level for SFC-authorized virtual asset funds.
⑤ Valuation of Virtual Assets: On valuation, the SFC specifies that authorized virtual asset fund managers should use pricing methods based on major trading platforms—specifically, benchmark indices issued by reputable providers reflecting substantial underlying spot trading activity.
⑥ Risk Disclosure and Investor Education: The Circular mandates full risk disclosure in offering documents and financial reports, and requires issuers and distributors to conduct investor education prior to launching products.
⑦ Approval Requirement: According to the Circular, any fund intending to issue or planning to invest 10% or more of its total assets in cryptocurrencies must consult the SFC and obtain prior approval.
1.2 Conditions for Investor Participation
Hong Kong has enacted legislation governing cryptocurrency trading, permitting only exchanges licensed by the SFC to legally operate crypto trading services. However, since ETFs are not considered direct purchases of virtual currencies, they fall under fund regulation under current Hong Kong laws. Therefore, any cryptocurrency ETF legally listed on the SFC and the Hong Kong Stock Exchange can be purchased through legal channels.
In terms of current trading practices in Hong Kong, investors must purchase a minimum number of fund units, which varies across different ETFs and affects transaction costs. For example, the minimum investment for Samsung Bitcoin Futures Active ETF is 50 units, while Southern Orion Bitcoin Futures ETF (3066.HK) requires 100 units. There are also investor restrictions: per the Joint Circular, sales of virtual asset-related products must comply with jurisdictional regulations, meaning spot virtual asset ETFs are prohibited from being sold directly or indirectly to individuals or entities in mainland China. Mainland Chinese individuals or corporations may not purchase Bitcoin ETFs directly or indirectly without obtaining all required governmental approvals from mainland China.
2. Existing Bitcoin Futures ETFs in Hong Kong
HSBC Hong Kong has recently opened access to three ETFs, all approved and listed on the Hong Kong Stock Exchange: Southern Orion Bitcoin Futures ETF, Southern Orion Ether Futures ETF, and Samsung Bitcoin Futures ETF.
2.1 Southern Orion Bitcoin Futures ETF
The Southern Orion Bitcoin Futures ETF is Hong Kong’s first Bitcoin futures ETF, tracking Bitcoin futures contracts listed on the Chicago Mercantile Exchange (CME). Issued by Southern Orion Asset Management Limited, it was listed on December 16, 2022, with a minimum investment threshold of 100 fund units. As of February 1, 2024, its asset size reached USD 30.8 million, with 13.89 million shares outstanding and a net asset value per unit of USD 2.2175. The fund charges an annual management fee (including trustee, custody, and administrative fees) of 1.99%, with estimated annual recurring expenses of 2.0%. Since inception, the fund has returned 131.00%; over the past year, it gained 62.08%, and over the past month, it rose 1.03%.
2.2 Southern Orion Ether Futures ETF
The Southern Orion Ether Futures ETF tracks Ether futures contracts on the CME. Also issued by Southern Orion Asset Management Limited, it was listed on December 16, 2022, requiring a minimum of 100 fund units. As of February 1, 2024, its assets totaled USD 12.09 million, with 7.24 million shares outstanding and a net asset value per unit of USD 1.6709. The annual management fee is 1.99%, with estimated annual recurring expenses of 2.0%. The fund has returned 71.07% since launch, 80.16% over the past year, and 11.29% over the past month.
2.3 Samsung Bitcoin Futures ETF
The Samsung Bitcoin Futures ETF tracks Bitcoin futures contracts on the CME and is issued by Samsung Asset Management (Hong Kong) Limited. Listed on January 13, 2023, it has a lower entry threshold of 50 fund units. As of February 1, 2024, its assets stood at USD 10.14 million, with 4.75 million shares outstanding and a net asset value per unit of USD 2.12. The annual management fee is 0.89%, with estimated annual recurring expenses of 2.0%. The fund has gained 96.70% since its launch.
3. Tax Treatment for Bitcoin ETF Investments by Residents of Hong Kong and Singapore
Taxation of Bitcoin ETFs generally follows the same principles as other ETFs, involving capital gains tax, income tax, and withholding tax. Specific taxation depends on factors such as the ETF’s jurisdiction and structure, the investor’s residency, and the location of the underlying investments. In the case of selling versus redeeming ETFs, sale proceeds constitute a taxable capital gain event, whereas redemption is typically non-taxable. Dividends from foreign Bitcoin ETFs may be subject to withholding tax.
3.1 Tax Treatment for Hong Kong Residents Investing in Bitcoin Futures ETFs
Hong Kong applies a territorial tax system, taxing only profits and income sourced from within Hong Kong. Neither individuals nor corporations are taxed on capital gains. However, if equity holdings are short-term, capital gains from sales may be deemed trading income and thus subject to profits tax. Generally, capital gains realized by Hong Kong residents from selling Bitcoin ETFs are not subject to profits tax. Similarly, dividends received by Hong Kong residents from Bitcoin ETFs are usually tax-free.
For corporate investors, capital gains from selling Bitcoin ETFs are subject to profits tax. The first HKD 2 million of assessable profits for a corporation is taxed at 8.25%, with the remainder taxed at 16.5%. For sole proprietors or partners, the two-tiered rates are 7.5% and 15%, respectively. Corporate investors generally do not pay taxes on dividend income received from Bitcoin ETF investments.
3.2 Tax Treatment for Singapore Residents Investing in Bitcoin Futures ETFs
Like Hong Kong, Singapore does not impose capital gains tax on individuals or corporations. However, to prevent tax avoidance, capital gains from short-term share disposals may be treated as business income and taxed accordingly. Gains from disposing shares held for more than 24 months and representing more than 20% ownership are generally exempt from tax. Additionally, Hong Kong does not impose withholding tax on dividends paid to non-residents; therefore, Singaporean residents or corporations receiving dividends from Hong Kong Bitcoin ETFs are not subject to withholding tax.
At the investor level, Singapore also adopts a territorial tax principle, taxing only income generated in or derived from Singapore. However, under Singapore’s Income Tax Act, foreign-sourced income remitted, transmitted, or brought into Singapore is deemed to be “derived from Singapore” and thus potentially taxable.
If individual investors bring income earned from investing in Hong Kong Bitcoin ETFs into Singapore, they are generally required to pay personal income tax on this amount. Singapore’s personal income tax rate in 2024 ranges from 0% to 24%, depending on the individual’s taxable income.
Singapore resident companies enjoy tax exemption on foreign-sourced dividend income if the following conditions are met: (1) the highest headline corporate tax rate in the country where the income arises is at least 15%; (2) the income has already been taxed in the source country; and (3) the tax authority determines that granting the exemption would benefit the resident company.
4. Developments Regarding Spot Bitcoin ETFs
In 2022, Hong Kong approved futures-based cryptocurrency ETFs. Currently, there are three listed products: Southern Orion Bitcoin Futures ETF, Southern Orion Ether Futures ETF, and Samsung Bitcoin Futures ETF. However, their asset sizes remain relatively small, with each fund’s AUM below USD 100 million.
In December 2023, the SFC and the Hong Kong Monetary Authority jointly issued a circular stating they are ready to accept applications for spot virtual asset ETFs. This marks Hong Kong as the first market in Asia poised to allow listing of spot virtual asset ETFs.
On January 26, 2024, Harvest Fund Management (Hong Kong) submitted an application for a Bitcoin ETF, becoming the first institution in Hong Kong to apply for a spot Bitcoin ETF. Media reports suggest the SFC aims to expedite the approval process, with plans to list the first Hong Kong spot Bitcoin ETF on the Hong Kong Stock Exchange after the Lunar New Year. The SFC may follow the U.S. model by approving multiple applications simultaneously. To date, apart from Harvest Fund, no other institutions have formally submitted applications, although firms like Southern Orion have engaged in repeated discussions with the SFC.
As Bitcoin continues to gain regulatory acceptance and market maturity, the introduction of spot Bitcoin ETFs bridges traditional financial markets with the virtual asset sector, marking a significant opening of structured finance to digital assets. Spot Bitcoin ETFs standardize Bitcoin as a financial product, offering investors a more accessible and regulated investment vehicle. They enhance market efficiency, improve risk management, and strengthen investor protection.
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