What are the best tax planning strategies for businesses investing in cryptocurrency?

IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. Businesses should be sure to do their own research and investigate tax regimes within their specific jurisdictions in detail.

Corporate decision-makers are increasingly attracted to the prospect of cryptocurrency business accounts due to their flexibility and potential to deliver returns that far exceed those of their traditional predecessors. 

Every business has a responsibility to seek out the most rewarding investment opportunities and not let their corporate treasuries fester in low-paying accounts. However, while cryptocurrency finance is free from many traditional limitations, it is still affected by tax laws, which must be carefully followed.      

The main challenges of taxation for businesses that invest in cryptocurrency: 

  • In the US, cryptocurrency is classified by the IRS not as a currency or security but as a property. This is the same in the UK, although the exact regulations are as yet undefined. Similar laws apply in other parts of the world, though some countries have specific exemptions.  
  • Returns from crypto trading are subject to capital gains tax, which in the US can be as high as 37% for short-term assets. Other earnings from cryptocurrency may also be subject to other taxes, such as income tax. 
  • Tax laws and regulations relating to cryptocurrency are often unclear and are going through continual updates and changes. 

Minimizing capital gains tax

Businesses that hold cryptocurrency need to be mindful of the fact that the exchange of cryptocurrency is also taxable, and moving from one currency to another will also trigger capital gains. Even paying for goods and services with crypto is viewed as a taxable transaction. 

When cryptocurrencies lose value, selling coins will represent a capital loss that can be used to offset capital gains tax incurred in crypto trading or elsewhere. When your annual capital losses exceed your gains, this can be carried over to offset gains in years to come, though it cannot be applied to past years. 

The Wash Sale rules prevent traders from buying back stock or securities that they sold at a loss, within a 30-day period. The good news for businesses investing in cryptocurrency is that these rules do not apply to crypto, although tax authorities may raise concerns over such transactions, so always conduct your own independent research.  

Short-term capital gains are those incurred by buying and selling an asset within a 365-day period, with rates dependent on the tax bracket that can be as high as 37% in the US. Long-term capital gains are for assets that are bought and sold in a period longer than a year, for which the rates are 20% or lower. There are various tools available for calculating capital gains and income from mining and staking, such as Bitcoin.tax or Koinly. This is an advisable technology for automating a complex process for all crypto investors.

Decentralized finance

Many business investors choose to take advantage of the high yields offered by many decentralized finance (DeFi) platforms, which can have Annual Percentage Yields (APYs) as high as 18%. Taxes apply to transactions in DeFi, and these can be either income tax or capital gains tax, depending on the asset and platform.

When users lend crypto and receive the same crypto in interest payments to their wallet balance, the income generated is classed as ordinary income and marginal tax rates apply. But for the DeFi platforms that use Liquidity Pool Tokens (LPT) which are staked in a liquidity pool, the profits are classed as property so capital gains tax applies. 

When these are assets held over a year, in the US they become long-term capital gains and the rates are much lower, even as low as 0% depending on annual income, filing status, and the length of the period the cryptocurrency is held.     

In the case that cryptocurrency is earned as ordinary income then later sold after the value has increased, investors may be subject to both income tax and capital gains tax.  

Charitable trusts

Some individuals and business owners in the US also choose to manage capital gains tax on crypto by starting a tax-deductible charitable remainder trust that benefits a recognized charity after their death. By making a donation in cryptocurrency, the investor will receive regular payments from the trust, and as charities are tax exempt, there will be no need to pay tax on the capital gains. 

If an investor uses one of these trusts to sell $10 million in cryptocurrency and receives an annual income of $200,000 for the rest of their life, they will not pay tax on the sale and the capital gains on income will be reduced. For making a charitable donation, they will also receive a deduction on income tax, which can be carried over to five years in the future. In the UK, any crypto assets bequeathed to a charity in a will will remain capital gains tax-free.

Specific Identification Method (SIM)

A subset of the Specific Identification Method (SIM) – an accounting method used for the valuation of company inventory – is the Highest In-First Out (HIFO), which is used to calculate gains and losses. This involves these four points identified by the IRS:

  • Date and time of acquiring each unit
  • Basis and fair market value of each unit when it was acquired
  • Date and time each unit was sold or exchanged
  • Fair market value of each unit when sold or exchanged, and the amount of money or property received. 

Making use of HIFO for tax purposes generally requires capable crypto tax software. It shows the IRS you are selling units that you paid the highest price for, and it will result in a lower tax rate.  

Residence in a different jurisdiction

Although cryptocurrency is a property that is taxable in the US, the laws are different in every global region, so establishing residency overseas could represent considerable tax savings. There are many countries where tax regulations are favorable to the crypto investor, and there are also US states that are more tax-friendly. In particular, there are nine states that do not have any income taxes.

In Malaysia, cryptocurrencies are not considered to be assets or legal tender, they are not subject to capital gains tax, and transactions are not typically taxable; however, companies earning income from frequently trading digital assets may be liable for income tax. Long-term capital gains on cryptocurrencies are also not taxed in Singapore and Malta

Slovenia levies taxes on businesses selling cryptocurrencies but not individuals (but again no long-term capital gains), just as in Portugal there is no personal income tax or VAT on cryptocurrency but businesses are subject to tax on their gains. Similarly, Switzerland has some tax benefits for those trading or mining in cryptocurrency, but these are mainly aimed at individuals rather than businesses. 

Bermuda is a tax haven that doesn’t impose taxes on digital assets, and it also accepts payments for taxes and government services in US Dollar Coin (USDC).  

The laws and regulations that relate to tax on cryptocurrency are unclear in many parts of the world, however, and most are currently undergoing change, so those considering incorporation in another country will need to check the details first. But there are various international options that could be the answer to crippling tax rates.    

In summary, there are various techniques and practices that can be applied to cryptocurrency business savings to ensure the tax deducted from your earnings is kept to a minimum. Then you can be left to wonder at the astonishing returns that your YIELD App account has made possible.   

Once you understand your tax liabilities, are you interested in earning up to 18% APY on USDT, USDC, ETH and BTC? Then sign up for a YIELD App corporate account today! 

Read More

Related Articles

No items found.