The public company with the largest Bitcoin holding, MicroStrategy, faces a tax challenge due to its Bitcoin holdings. With an estimated $47 billion worth of Bitcoin, including $19 billion in unrealized gains, the company may be required to pay federal income taxes on these paper gains, even if it does not sell any bitcoin. The tax bill could total billions of dollars starting next year.
MicroStrategy’s Tax Issues
The issue arises from the U.S. Inflation Reduction Act of 2022, which introduced a “corporate alternative minimum tax” (CAMT). The tax rate of 15% would be applied to MicroStrategy’s adjusted earnings, resulting in a tax liability. The company’s best hope lies in the Internal Revenue Service (IRS) adopting new rules that exempt unrealized gains on crypto assets.
The IRS has proposed rules that exempt companies like Berkshire Hathaway from paying taxes on unrealized gains from securities like common stocks. However, these exemptions do not extend to crypto assets.
Tax analyst Robert Willens expects the IRS to decide in MicroStrategy’s favor and exclude unrealized gains on Bitcoins from the CAMT. However, there is no guarantee, and the outcome remains uncertain. If the firm is required to pay taxes on its unrealized Bitcoin gains, it may need to sell some of its holdings to cover the tax bill, which could affect its investment strategy.
The tax implications of MicroStrategy’s Bitcoin holdings are significant for the company and its investors. If the company starts paying taxes on unrealized gains, investors could be better off buying Bitcoin directly rather than through MicroStrategy’s stock.
Why MicroStrategy May Be Considered
President Donald Trump’s stance on crypto could be a key factor in exempting MicroStrategy from paying taxes on its unrealized Bitcoin gains. During his campaign, Trump promised to eliminate capital gains taxes on U.S.-issued crypto, including Bitcoin, which could significantly impact companies like MicroStrategy, which holds large amounts of Bitcoin.
Trump’s pro-crypto stance will likely influence the IRS’s decision on MicroStrategy’s tax exemption. Given the president’s support of the crypto industry, the IRS may be more inclined to grant MicroStrategy’s request.
MicroStrategy’s exemption from paying taxes on its unrealized gains could allow it to continue its “Bitcoin-first” strategy without worrying about the tax implications. This could also set a precedent for other companies that hold crypto, potentially leading to a more favorable tax environment for the entire crypto industry.
Interestingly, despite its tax problems, Microstrategy is still aggressively buying bitcoins. Its latest purchase of 11,000 BTC suggests that the company refuses to be distracted from its long-term goal of being the “world’s leading Bitcoin bank.”
