How to Hold Cryptocurrency in a Cross Border Portfolio

Introduction

With news of inflation and pending interest rate hikes on every front page, many are carefully watching to see if cryptocurrency will prove to be the hedge against inflation many hoped it would be.  While that remains to be seen, some of the world’s largest asset managers continue to express increasing interest as cryptocurrency becomes more mainstream. This could be a sign that cryptocurrency is still on track to transform the way we think about money and how we invest.  What is sure is that for those who hold a cross border portfolio, there are special considerations to take into account before taking the plunge.  In this blog post, we explore what cryptocurrency is, how to purchase it for a cross border portfolio and potential problems to avoid.

What is Cryptocurrency

Cryptocurrency is a digital asset that is secured by cryptography. You’ve probably heard of popular cryptocurrencies such as Bitcoin, Ethereum and Dogecoin. Bitcoin was the first cryptocurrency and remains the largest with a market value of over a trillion USD. Unlike traditional currencies, it is not pegged to a tangible asset and is not issued by a government. However, there is a finite number of Bitcoin and therefore it is seen by some industry experts as a store of value that could be a hedge against inflation and is sometimes referred to as digital gold. Bitcoin and other cryptocurrencies are “mined” when specialized computers solve a complex computational math problem thereby creating a new block on a blockchain which is akin to an electronic ledger.  Roughly 90% of Bitcoin has already been mined but mining becomes exponentially more difficult every four years leading to criticism that mining requires increasing energy consumption which is a reason some Environmental, Social and Government (ESG) minded investors avoid it. Cryptocurrency is also in unchartered territory in terms of government regulation and most experts agree it is not a matter of “if” but “when ” and “how” it will be regulated.

In a best-case scenario, cryptocurrency could serve as a hedge against inflation and have a low correlation with traditional financial markets during a Bear market while sustaining increasing gains. But the truth is, given the wild volatility of cryptocurrency’s rise, no one can predict its future growth or losses, making it highly speculative.

How to Buy Cryptocurrency for a Cross Border Portfolio

A digital wallet

It used to be that in order to purchase cryptocurrency, you needed a cryptocurrency trading platform and a digital wallet to hold it in. This meant linking to the necessary digital wallet to store the public and private keys to buy different types of cryptocurrencies. Although cryptology made these accounts relatively safe from being hacked, a digital wallet could still be an easy target for hackers that steal billions of dollars worth of cryptocurrency each year. This vulnerability and the convenience of buying on your existing platform is what makes the idea of a cryptocurrency exchange traded fund (ETF) a very attractive alternative.

If you’re buying on the Toronto Stock Exchange, hooray!

If you’re a Canadian residing in Canada, you’ll be happy to hear that Canadian regulators were the first in North American to approve ETFs that hold cryptocurrencies. The ETF can be purchased via your regular trading platform and can even be held in a Tax Free Savings Account (TFSA) thereby avoiding the capital gains tax you’d pay for the same gains in a digital wallet.

There are several cryptocurrency ETFs to choose from but the first to be approved was the Purpose Bitcoin ETF (BTCC.B) which gives investors direct exposure to Bitcoin. When an investor buys shares of this ETF, BTCC purchases equivalent Bitcoin and holds it in cold storage–meaning it’s offline and safer from hacking. When you sell your BTCC shares, they are sold on the market for cash that is then paid to you.

But what if you are buying on the American Stock Exchange? 

As of the date of this article, the Securities and Exchange Commission (SEC) has yet to approve a true cryptocurrency ETF.  There are ETFs out there that aim to track cryptocurrencies without holding it. One such example is ProShares Bitcoin Strategy ETF (BITO) which is based on future contracts. However, it’s an imperfect ETF for tracking Bitcoin as ongoing roll costs could risk underperforming Bitcoin over time.

If you are trading on the American stock exchange, you will need to weigh the convenience of purchasing an ETF that is cryptocurrency adjacent but not equivalent to purchasing cryptocurrency itself or be ready to set up a digital wallet for purchasing cryptocurrency directly.

Cross Border Pitfalls When Owning Cryptocurrency

Whichever way you decide to include cryptocurrency in your portfolio, if you hold a cross border portfolio, remember you may need to further take into account any foreign income taxes that could apply and the risk of double taxation in determining which investment makes the most dollar sense for you.  

Taxation of cryptocurrency is a fairly new and still evolving. It is also important to know that Canadian and US governments view crypto holdings differently and tax implications vary as a result. Even how you came to own the cryptocurrency (ie compensation vs purchasing) can make a difference in how you are taxed. You should know that every time you trade one cryptocurrency for another, you may be triggering a taxable event.  And lastly, any American regardless of where they reside, should probably resist the temptation to buy a Canadian ETF that could count as a Passive Foreign Investment Company (PFIC) and open up a whole new world of reporting pain.

Need to Know More?

Here at MCA, we don’t have a crystal ball that will tell you the future of cryptocurrency. We do, however, have a dedicated team of professionals that can help make your cross border portfolio as tax efficient as possible. If you have questions about the cryptocurrency in your portfolio and how it will be treated on either side of the border, don’t hesitate to book a consultation with us today.