Accordingly, the Sponsor takes the position that the Trust is
properly treated as a grantor trust for U.S. federal income tax
purposes. Assuming that the Trust is a grantor trust, the Trust
will not be subject to U.S. federal income tax. Rather, if the
Trust is a grantor trust, each beneficial owner of Shares will be
treated as directly owning its pro rata Share of the Trust’s assets
and a pro rata portion of the Trust’s income, gain, losses and
deductions will “flow through” to each beneficial owner of
Shares.
If the Trust were not properly classified as a grantor trust, the
Trust might be classified as a partnership for U.S. federal income
tax purposes. However, due to the uncertain treatment of digital
assets, including forks, airdrops and similar occurrences for U.S.
federal income tax purposes, there can be no assurance in this
regard. If the Trust were classified as a partnership for U.S.
federal income tax purposes, the tax consequences of owning Shares
generally would not be materially different from the tax
consequences described herein, although there might be certain
differences, including with respect to timing. In addition, tax
information reports provided to beneficial owners of Shares would
be made in a different form. If the Trust were not classified as
either a grantor trust or a partnership for U.S. federal income tax
purposes, it would be classified as a corporation for such
purposes. In that event, the Trust would be subject to entity-level
U.S. federal income tax (currently at the rate of 21%) on its net
taxable income and certain distributions made by the Trust to
shareholders would be treated as taxable dividends to the extent of
the Trust’s current and accumulated earnings and profits.
In accordance with GAAP, the Trust has defined the threshold for
recognizing the benefits of tax return positions in the financial
statements as
“more-likely-than-not”
to be sustained by the applicable taxing authority and requires
measurement of a tax position meeting the
“more-likely-than-not”
threshold, based on the largest benefit that is more than 50%
likely to be realized. Tax positions not deemed to meet the
“more-likely-than-not”
threshold are recorded as a tax benefit or expense in the current
period. As of, and during the periods ended March 31, 2022 and
December 31, 2021, the Trust did not have a liability for any
unrecognized tax amounts. However, the Sponsor’s conclusions
concerning its determination of
“more-likely-than-not”
tax positions may be subject to review and adjustment at a later
date based on factors including, but not limited to, further
implementation guidance, and
on-going
analyses of and changes to tax laws, regulations and
interpretations thereof.
The Sponsor of the Trust has evaluated whether or not there are
uncertain tax positions that require financial statement
recognition and has determined that no reserves for uncertain tax
positions related to federal, state and local income taxes existed
as of March 31, 2022 or December 31, 2021.
The Trust considers the following entities, their directors, and
employees to be related parties of the Trust: DCG, Genesis,
Grayscale and CoinDesk Indices, Inc. As of March 31, 2022 and
December 31, 2021, 30,245,514 and 25,327,433 Shares of the
Trust were held by related parties of the Trust,
respectively.
The Sponsor’s parent, an affiliate of the Trust, holds a minority
interest in Coinbase, Inc., the parent company of the Custodian,
that represents less than 1.0% of Coinbase Inc.’s ownership.
In accordance with the Trust Agreement governing the Trust, the
Trust pays a fee to the Sponsor, calculated as 2.0% of the
aggregate value of the Trust’s assets, less its liabilities (which
include any accrued but unpaid expenses up to, but excluding, the
date of calculation), as calculated and published by the Sponsor or
its delegates in the manner set forth in the Trust Agreement (the
“Sponsor’s Fee”). The Sponsor’s Fee accrues daily in U.S. dollars
and is payable in Bitcoin, monthly in arrears. The amount of
Bitcoin payable in respect of each daily U.S. dollar accrual will
be determined by reference to the same U.S. dollar value of Bitcoin
used to determine such accrual. For purposes of these financial
statements, the U.S. dollar value of Bitcoin is determined by
reference to the Digital Asset Exchange Market that the Trust
considers its principal market as of 4:00 p.m., New York time, on
each valuation date. The Trust held no Incidental Rights or IR
Virtual Currency as of March 31, 2022 and December 31,
2021. No Incidental Rights or IR Virtual Currencies have been
distributed in payment of the Sponsor’s Fee during the three months
ended March 31, 2022 and 2021.
As partial consideration for receipt of the Sponsor’s Fee, the
Sponsor is obligated under the Trust Agreement to assume and pay
all fees and other expenses incurred by the Trust in the ordinary
course of its affairs, excluding taxes, but including marketing
fees; administrator fees, if any; custodian fees; transfer agent
fees; trustee fees; the fees and expenses related to the listing,
quotation or trading of the Shares on any secondary market
(including customary legal, marketing and audit fees and expenses)
in an amount up to $600,000 in any given fiscal year; ordinary
course legal fees and expenses; audit fees; regulatory fees,
including, if applicable, any fees relating to the registration of
the Shares under the Securities Act or the Exchange Act; printing
and mailing costs; the costs of maintaining the Trust’s website and
applicable license fees (the “Sponsor-paid Expenses”), provided
that any expense that qualifies as an Additional Trust Expense will
be deemed to be an Additional Trust Expense and not a Sponsor-paid
Expense.
The Trust may incur certain extraordinary,
non-recurring
expenses that are not Sponsor-paid Expenses, including, but not
limited to, taxes and governmental charges, expenses and costs of
any extraordinary services performed by the Sponsor (or any other
service provider) on behalf of the Trust to protect the Trust or
the interests of shareholders (including in connection with any
Incidental Rights and any IR Virtual Currency), any indemnification
of the Custodian or other agents, service providers or
counterparties of the Trust, the fees and expenses related to the
listing, quotation or trading of the Shares on any secondary market
(including legal, marketing and audit fees and expenses) to the
extent exceeding $600,000 in any given fiscal year and
extraordinary legal fees and expenses, including any legal fees and
expenses incurred in connection with litigation, regulatory
enforcement or investigation matters (collectively “Additional
Trust Expenses”). In such