Main Takeaways
- According to attorneys at Fenwick, locking BTC through Hashi and receiving a receipt token (hBTC), which confirms user deposits without an asset swap, should not constitute a taxable event under U.S. federal income tax law.
- Because hBTC reflects ownership of the underlying Bitcoin rather than a distinct asset, no disposition of BTC occurs for purposes of existing U.S. tax principles.
Overview
The following guest post is provided by attorneys at Fenwick law firm, offering an analysis of the U.S. Federal income tax considerations associated with locking Bitcoin through Hashi and receiving a corresponding BTC-linked receipt token. As Bitcoin-based financial products expand, tax treatment has become a key factor in how institutions and market participants evaluate different approaches to deploy native Bitcoin directly into financial products on Sui. Understanding the potential tax treatment of Hashi has meaningful implications for its users.
Fenwick's Perspective
Although there is no express guidance on the tax consequences of locking Bitcoin in exchange for a BTC-linked asset on the Sui network – specifically through the use of Hashi wallets and hBTC – a proper understanding of the facts leads to the comfortable conclusion that the depositing of Bitcoin into a Hashi wallet (and the corresponding receipt of hBTC, a receipt token), and the redemption of the hBTC for Bitcoin, ought not to be considered taxable events. While we strongly recommend that you talk to your personal tax advisor about the below – and emphasize that none of this is tax advice – the following should nevertheless be helpful to understand the proper tax treatment.
Bitcoin can be locked by placing it into a Hashi Wallet on the Bitcoin blockchain. When this occurs, the holder of Bitcoin receives a receipt token called hBTC. In each case, such BTC is secured on the Bitcoin network via a decentralized Multi-Party Computation (“MPC”) threshold signature scheme. The MPC network acts as a distributed co-signer using key shards for each MPC wallet that, in each case, are held by a group of Sui network validators. A valid Bitcoin signature can only be generated when a threshold of these validators interacts, ensuring no single party ever holds or reconstructs the full private key. The Bitcoin held in a Hashi Wallet cannot be moved without the use of a deposited hBTC token, effectively “locking” the underlying Bitcoin in the Hashi Wallet while the holder holds the hBTC token. The hBTC token thus enables the “unlocking” of the Bitcoin held in the Hashi wallet.
Important from a tax perspective, the holder of the BTC never relinquishes beneficial ownership of the underlying Bitcoin. The hBTC is simply evidence and a direct reflection of ownership of the underlying Bitcoin. All price risk of the underlying Bitcoin is borne by the holder of hBTC. It is substantially similar to an ADR or a bill of lading or a coat check ticket –all of which evidence ownership of an underlying asset. If the hBTC is sold, then it is a sale of the underlying Bitcoin. And if it is redeemed, it is merely a retrieval of the underlying Bitcoin, or in other words an unlocking of the Bitcoin already beneficially owned by the holder of the hBTC.
The Tax Code provides rules for determining the amount and timing of gain or loss arising from selling, exchanging, or disposing of property. But when a person merely ties up an asset and obtains a “receipt” evidencing ownership of the asset— for example, a coat check ticket—the Tax Code provides that the person has not sold or exchanged the underlying property for U.S. federal income tax purposes. This is obvious to any concertgoer who checks their coat—there is no tax on checking your coat and receiving a ticket nor is there tax on turning in your ticket and retrieving the coat. And if you sell your ticket, what you are selling is your coat. Using this analogy, going from Bitcoin to hBTC (and vice versa) ought not to be a taxable event. Simply put, nothing is exchanged. The benefits and burdens of owning Bitcoin never shift.
Even if you were to argue that an exchange occurred, however, the tax law requires more. Treasury Regulations require that the sale or other disposition must be of property that differs “materially either in kind or in extent.” The U.S. Supreme Court (in a case called Cottage Savings v. Commissioner) has interpreted this test as requiring that there be an exchange of properties with legally distinct entitlements. But hBTC does not represent a legally distinct entitlement from the underlying Bitcoin. The hBTC is simply evidence of the legal entitlements of the underlying Bitcoin and the holder of hBTC retains the benefits and burdens of owning the underlying Bitcoin. Thus, supplying a native token (Bitcoin) and receiving a BTC-linked token (hBTC) as a receipt does not result in an exchange of “property that differs materially either in kind or extent.”
Thus, under the principles outlined above, neither the receipt of hBTC upon the deposit of Bitcoin, nor the redemption of hBTC for Bitcoin ought to result in a taxable disposition under U.S. federal income tax law.
For more information about Hashi and how Bitcoin-backed credit markets are being developed on Sui, visit the Hashi page at sui.io/hashi or contact the team at [email protected] to learn more.
Note: This discussion of certain U.S. federal income tax matters is provided for informational purposes only. It is not intended to serve as tax advice and cannot be relied upon as such. Those engaged in wrapping and unwrapping transactions should consult their own tax advisor regarding the matters discussed herein.
