According to a Report of The Wall Street Journalbusiness intelligence firm MicroStrategy could face significant tax liabilities on its unrealized Bitcoin (BTC) profits, valued at $19 billion. MicroStrategy, specifically the world’s largest corporate BTC holder, currently has more than 430,000 BTC on its balance sheet.
Unrealized Bitcoin profits 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 money through equity and debt offerings to fund its BTC purchases.
Although MicroStrategy has not sold any Bitcoin to date, it may still have to pay billions in taxes on its holdings due to the CAMT (Corporate Alternative Minimum Tax) provision under the Inflation Reduction Act passed in 2022. Specifically, the CAMT imposes a 15% tax rate based on an adjusted version of a company’s earnings.
It is important to note that the Internal Revenue Service (IRS) provides exemptions for unrealized gains on securities, such as common stock. However, the IRS has yet to extend such exemptions to unrealized gains on cryptocurrency assets such as Bitcoin.
Tax analyst Robert Willens commented that the IRS may draft rules that favor MicroStrategy, especially given Donald Trump’s pro-crypto stance. However, he cautioned that this outcome is not guaranteed. Willens explained:
If the Biden group were still in place, they probably wouldn’t get the exemption. It would be easy to place crypto assets in the same exemption that stocks will enjoy, as there is no real difference in accounting.
If MicroStrategy were to pay taxes on its unrealized Bitcoin profits, the company may be forced to sell off some of its holdings to raise cash. Such a move could disrupt the volatile crypto market, potentially triggering a broader market-wide decline.
Notably, both MicroStrategy and Coinbase have petitioned the US Treasury Department and the IRS to exclude unrealized crypto gains from the adjusted calculation of financial income under CAMT. In their requestthe companies argued that such actions are necessary to “avoid serious unintended consequences for US companies that hold significant cryptocurrency holdings.”
The IRS is keeping an eye on crypto
As tax season approaches, the IRS is increasing its efforts to ensure greater transparency in cryptocurrency transactions. Recently the agency was introduced a new reporting system for centralized exchanges to track crypto transactions more efficiently.
The IRS has also reaffirmed its stance on crypto-staking, indicates that any rewards generated from wagering are taxable upon receipt. According to the agency, stake rewards are not classified as new property and should therefore be taxed immediately upon acquisition.
That said, optimism among financial advisors has rose after Trump’s victory in the US presidential election, where the majority of them showed greater willingness to explore investments in digital assets. At press time, Bitcoin is trading at $105,523, up 2.6% over the past 24 hours.
Featured image from Unsplash.com, chart from TradingView.com
