U.S. Holder’s pro rata share of the AVAX transferred and (ii) the U.S. Holder’s tax basis for its pro rata share of the AVAX transferred. Any such gain or loss will be short-term capital gain or loss if the U.S. Holder’s holding period for its pro rata share of the AVAX is one year or less and long-term capital gain or loss if the U.S. Holder’s holding period for its pro rata share of the AVAX is more than one year. A U.S. Holder’s tax basis in its pro rata share of any AVAX transferred by the Trust generally will be determined by multiplying the tax basis of the U.S. Holder’s pro rata share of all of the AVAX held in the Trust immediately prior to the transfer by a fraction the numerator of which is the amount of AVAX transferred and the denominator of which is the total amount of AVAX held in the Trust immediately prior to the transfer. Immediately after the transfer, the U.S. Holder’s tax basis in its pro rata share of the AVAX remaining in the Trust will be equal to the tax basis of its pro rata share of the AVAX held in the Trust immediately prior to the transfer, less the portion of that tax basis allocable to its pro rata share of the AVAX transferred. A U.S. Holder’s receipt of distributions of cash proceeds from the sale of AVAX (other than in connection with a redemption) should not, itself, be a taxable event to a U.S. Holder. As noted above, the IRS has taken the position in the Ruling & FAQs that, under certain circumstances, a hard fork of a digital asset constitutes a taxable event giving rise to ordinary income, and it is clear from the reasoning of the Ruling & FAQs that the IRS generally would treat an airdrop as a taxable event giving rise to ordinary income. As described above, the Sponsor has committed to causing the Trust to abandon all Incidental Rights and IR Virtual Currency to which the Trust otherwise might become entitled. If, however, the Trust were to receive and retain IR Virtual Currency in the future, a U.S. Holder would have a basis in that IR Virtual Currency equal to the amount of income the U.S. Holder recognizes as a result of such fork or airdrop and the U.S. Holder’s holding period for such IR Virtual Currency would begin as of the time it recognizes such income. Similarly, although the IRS has not issued similar guidance with respect to staking, if the Staking Condition is satisfied and the Trust were to receive any Staking Consideration in connection with Staking, it is likely that a U.S. Holder will have a basis in any AVAX received as part of such Staking Consideration equal to the amount of income that the U.S. Holder recognizes and the U.S. Holder’s holding period for such Staking Consideration will begin as of the time it recognizes such income. U.S. Holders’ pro rata shares of the expenses incurred by the Trust will be treated as “miscellaneous itemized deductions” for U.S. federal income tax purposes. As a result, a non-corporate U.S. Holder’s share of these expenses will not be deductible for U.S. federal income tax purposes. On a sale or other disposition of Shares, a U.S. Holder will be treated as having sold the AVAX underlying such Shares. Accordingly, the U.S. Holder generally will recognize gain or loss in an amount equal to the difference between (i) the amount realized on the sale of the Shares and (ii) the portion of the U.S. Holder’s tax basis in its pro rata share of the AVAX held in the Trust that is attributable to the Shares that were sold or otherwise subject to a disposition. Such tax basis generally will be determined by multiplying the tax basis of the U.S. Holder’s pro rata share of all of the AVAX held in the Trust immediately prior to such sale or other disposition by a fraction the numerator of which is the number of Shares disposed of and the denominator of which is the total number of Shares held by such U.S. Holder immediately prior to such sale or other disposition (such fraction, expressed as a percentage, the “Share Percentage”). If the U.S. Holder’s share of the Trust’s AVAX consists of separate lots with separate tax bases and/or holding periods, the U.S. Holder will be treated as having sold the Share Percentage of each such lot. Gain or loss recognized by a U.S. Holder on a sale or other disposition of Shares will generally be short-term capital gain or loss if the U.S. Holder’s holding period for the AVAX underlying such Shares is one year or less and long-term capital gain or loss if the U.S. Holder’s holding period for the AVAX underlying such Shares is more than one year. The deductibility of capital losses is subject to significant limitations. If the Trust redeems all or a portion of a U.S. Holder’s Shares in exchange for the underlying AVAX represented by the redeemed Shares, such redemption generally would not be a taxable event to the U.S. Holder. The U.S. Holder’s tax basis in the AVAX received in the redemption generally would be the same as the U.S. Holder’s tax basis for the portion of its pro rata share of the AVAX held in the Trust immediately prior to the redemption that was attributable to the Shares redeemed, determined as described above, and the U.S. Holder’s tax basis in its remaining pro rata portion, if any, of the AVAX held in the Trust after the redemption would be equal to the tax basis of its pro rata share of the total amount of the AVAX held in the Trust immediately prior to the redemption, less the U.S. Holder’s tax basis in the AVAX received in the redemption. The U.S. Holder’s holding period with respect to the AVAX received would generally include the period during which the U.S. Holder held the Shares so redeemed. A subsequent sale of the AVAX received in such redemption would generally be a taxable event.
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