Dividend Distributions in Crypto-Linked Funds and OILK
- Do the Crypto-Linked Funds (BITO, BITI, EETH, BETE, BETH, SETH) and OILK distribute dividends?
- Why do these Funds distribute dividends?
- What is the source of the distributions? Why are they typically characterized as dividend distributions instead of capital gain distributions?
- How is the amount of each Fund’s dividend distributions determined?
- How are the dividend distributions taxed?
- Where can I find additional information about dividend distributions?
Do the Crypto-Linked Funds (BITO, BITI, EETH, BETE, BETH, SETH) and OILK distribute dividends?
Like many mutual funds and ETFs these Funds may distribute dividends. Each of the Funds listed above has a monthly dividend distribution schedule, but may or may not issue a monthly dividend. See Distribution Schedule
Why do these Funds distribute dividends?
All 1940 Act registered mutual funds and ETFs are required to distribute nearly all of their taxable income by the end of each calendar year to avoid excise taxes.
What is the source of the distributions? Why are they typically characterized as dividend distributions instead of capital gain distributions?
Each of the Funds gets exposure to oil, bitcoin and/or ether futures contracts, as applicable, by investing in a wholly owned subsidiary which, in turn, invests in futures contracts. For tax purposes, each Fund recognizes any net income of its subsidiary, including gains on the futures contracts in which its subsidiary invests, as an ordinary dividend on the final day of the subsidiary’s tax year. When paid to Fund shareholders, these amounts are characterized for tax purposes as dividend distributions and are not eligible for capital gains treatment.
Other securities held by the Funds, such as U.S. Treasury securities, may generate interest and capital gains (or losses), which may also be distributed.
The tax year end for each subsidiary of the crypto-linked Funds is September 30. The tax year end for the subsidiary of OILK is October 31.
How is the amount of each Fund’s dividend distributions determined?
The amount of each Fund’s monthly dividend distribution (if any) is intended to estimate the Fund’s current required calendar year distribution allocated equally over the remaining months of the calendar year.
It is important to remember that the dividend distribution amount for each Fund may change significantly from month to month. In some months, a Fund may not make any dividend distributions at all. For example, a Fund may not make distributions if its subsidiary has had significant recent losses or if the distributions previously paid by the Fund have already covered the Fund’s expected required calendar-year dividend distribution.
The monthly dividend distribution amount for each Fund, in general, can be expected to approximate the total of:
- The previous month’s undistributed net investment income for such Fund (without regard to its subsidiary). Net investment income typically consists of interest earned on cash investments, such as U.S. Treasury securities, minus accrued Fund expenses.
- The tax year-to-date net income of the Fund’s subsidiary for the subsidiary’s tax year ended September 30 (October 31 for OILK's subsidiary) of the current calendar year.
- The net income previously paid as dividend distributions by the Fund during the current calendar year.
- The number of scheduled dividend distribution dates remaining in the current calendar year. Distribution Schedule
Actual Fund distributions may be different from amounts determined using the approach described above.
For each crypto-linked Fund, the October, November and December distributions each calendar year typically reflect its subsidiary’s remaining undistributed net income earned only through September 30 of that year, since each crypto-linked subsidiary has a September 30 tax year-end. Each crypto-linked Fund generally does not begin distribution of the net income (if any) of its subsidiary earned in October, November and December of each calendar year until February of the following calendar year.
For OILK, the November and December distributions each year reflect its subsidiary’s net income only through the subsidiary’s October 31 tax year-end. OILK generally does not begin distribution of the net income (if any) of its subsidiary earned in November and December of each calendar year until February of the following calendar year.
For all Funds (and each subsidiary), monthly income and expenses (including at fiscal year-end) may be determined several days prior to month-end for operational reasons. Therefore, Fund distributions may not reflect actual income and expenses through month-end. Amounts not included in the calculation for a given month generally are reflected in the following month.
In addition to the factors described above, the amount of Fund distributions, if any, may be impacted by the level of Fund and subsidiary fees and expenses, portfolio investment and tax strategies, and other factors.
The approximate value of the monthly dividend per share for each Fund is its estimated monthly dividend amount divided by the outstanding shares of such Fund one day before the Fund’s ex-dividend date.
The approach described above is for illustrative purposes only. It should not be relied on as a definitive indicator of the level, character or frequency of Fund distributions, if any. This information is not intended as investment or tax advice and should not be used or relied on for investment purposes. The approach described above may be changed at any time without notice.
How are the dividend distributions taxed?
Generally, the Fund’s dividend distributions will be taxed as ordinary dividends, not qualified dividend income. It should be noted that in some circumstances distributions ultimately may be recharacterized as non-taxable distributions. For example, if a Fund or its subsidiary experiences significant losses later in its tax year, Fund distributions made earlier in the year may be recharacterized as a non-taxable return of capital distribution.
If you have questions about the tax implications of your investment in a Fund, you should consider consulting a tax professional.
Where can I find additional information about dividend distributions?
The dividend schedule can be found here: Distribution Schedule. Dividend rates are posted after the market close the evening prior to ex-date on each Fund’s product page. For 1099 purposes, the character of each dividend can be viewed on the ICI Primary Report posted in the Tax Supplement section here: Tax Supplements.