MicroStrategy, the largest corporate Bitcoin (BTC) holder, has an inventory of over $47 billion, including $18 billion in unrealized gains, following years of accumulating funds through debt and equity issues to purchase BTC.
But a new Wall Street Journal (WSJ) report says MicroStrategy might be required to pay federal income taxes on those paper gains.
Investment gains are often not subject to taxes until the assets are sold. However, Congress recently established a “corporate alternative minimum tax” through the Inflation Reduction Act 2022. This means MicroStrategy could pay taxes on the unrealized gains from its BTC holdings, and based on MicroStrategy’s financial statements, the tax rate would be 15%.
Microstrategy Could Be Exempt from Paying Taxes
Meanwhile, the Internal Revenue Service’s (IRS) adoption of new regulations could exonerate MicroStrategy from paying such taxes. Companies like Berkshire Hathaway are free from paying taxes on unrealized gains from assets like common stocks since the IRS has already included written exemptions in the currently proposed rules.
Nevertheless, the IRS has not yet granted any exemptions for businesses’ unrealized gains on cryptocurrency assets like Bitcoin. Given the Trump administration’s apparent interest in cryptocurrency, the corporate BTC holder could be the first to receive such an exemption.
The IRS is still developing rules for the new corporate alternative minimum tax. Long-time tax analyst Robert Willens stated in the WSJ report that the IRS will likely rule in MicroStrategy’s favor, which wouldn’t have been the case under Biden’s administration.
The company is currently in a difficult situation and could sell some of its BTCs to raise money if required to pay tax on its unrealized Bitcoin profits.
The US’ Corporation Alternatives Minimum Tax
the US implemented the corporation alternative minimum tax to curb businesses that report income for Generally Accepted Accounting Principles (GAAP) purposes while displaying little to no taxable revenue on their IRS filings.
Enron, for instance, was famous in the 1990s for reporting inflated GAAP profits while avoiding federal income taxes. In MicroStrategy’s example, the business might pay taxes on paper profits, which could be a loss if the value of Bitcoin declines significantly.
Before this year, businesses holding cryptocurrency assets did not include them in their GAAP financial reports at fair market valuations. Instead, cryptocurrencies were classified by the accounting rules as intangible assets whose value could be written down but not up.
Therefore, MicroStrategy’s GAAP results did not contain the unrealized gains from its Bitcoin holdings. This year, the Financial Accounting Standards Board established new regulations that upturned the previous rule.
The business intelligence firm will begin displaying the actual value of its Bitcoins on its financial records this year, and earnings will reflect value changes. In a filing on January 6, the company revealed figures for the first time that measured the effects of the accounting and tax changes.
Disclaimer
This article is provided for information only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
