According to a report by The Wall Street Journal, business intelligence firm MicroStrategy may face significant tax liabilities on its unrealized Bitcoin (BTC) gains, valued at $19 billion. MicroStrategy, notably the world’s largest corporate BTC holder, currently holds more than 430,000 BTC on its balance sheet.
Unrealized Bitcoin Gains Could Pose Challenges For MicroStrategy
As of now, MicroStrategy’s total Bitcoin holdings are worth over $47 billion, with $19 billion in unrealized gains. Over the years, the US-based company has raised funds through stock and debt offerings to finance its BTC purchases.
While MicroStrategy has not sold any Bitcoin to date, it may still be required to pay billions in taxes on its holdings due to the Corporate Alternative Minimum Tax (CAMT) provision under the Inflation Reduction Act passed in 2022. Specifically, the CAMT imposes a 15% tax rate based on an adjusted version of a corporation’s earnings.
It is important to note that the Internal Revenue Service (IRS) provides exemptions for unrealized gains from securities, such as common stock. However, the IRS has yet to extend such exemptions to unrealized gains on cryptocurrency assets like Bitcoin.
Tax analyst Robert Willens commented that the IRS may draft rules that favor MicroStrategy, particularly given Donald Trump’s pro-crypto stance. However, he cautioned that this outcome is not guaranteed. Willens explained:
If the Biden group was still in place, they probably wouldn’t get the exemption. It would be easy to slot crypto assets into the same exemption that stocks are going to enjoy, because there’s no real difference in the accounting.
Should MicroStrategy be required to pay taxes on its unrealized Bitcoin gains, the company might be forced to sell off a portion of its holdings to raise cash. Such a move could unsettle the volatile crypto market, potentially triggering a broader market-wide downturn.
Notably, both MicroStrategy and Coinbase have petitioned the US Treasury and IRS to exclude unrealized crypto gains from the adjusted financial income calculation under the CAMT. In their request, the firms argued that such measures are necessary to “avoid serious unintended consequences for U.S. corporations holding substantial cryptocurrency.”
IRS Keeping A Close Eye On Crypto
As the tax season approaches, the IRS is ramping up its efforts to ensure greater transparency in cryptocurrency transactions. Recently, the agency introduced a new reporting system for centralized exchanges to track crypto transactions more effectively.
The IRS has also reaffirmed its stance on crypto staking, stating that any rewards generated from staking are taxable upon receipt. According to the agency, staking rewards are not classified as new property, and thus, should be taxed immediately upon acquisition.
That said, optimism among financial advisors has risen following Trump’s victory in the US presidential election, with the majority of them showing greater willingness to explore investments in digital assets. At press time, Bitcoin trades at $105,523, up 2.6% in the past 24 hours.
Featured Image from Unsplash.com, Chart from TradingView.com