Background
Treasury and the IRS have issued a safe harbor, in the
form of Revenue Procedure 2025-31, under which a crypto
exchange-traded product (commonly referred to as a crypto ETF, but
more correctly described as a crypto ETP) can stake its digital
assets without being taxed as a domestic corporation. The revenue
procedure, while helpful, presents several questions and
challenges. This alert provides our initial high-level
reactions.
Crypto ETFs are structured as grantor trusts for US tax
purposes. Grantor trusts are intended to be, effectively, custodial
arrangements. If a crypto ETF qualifies as a grantor trust, it is
not subject to entity-level tax, and US investors receive tax
reporting on 1099s instead of K-1s (which apply to partners in a
partnership).
