Creating a Crypto LLC or Corporation

A Limited Liability Company (LLC)  is a type of business structure that gives its owners limited financial liability in the event of any lawsuits and debts. An LLC not only protects your personal assets but also ensures you're not personally held accountable for any debts or liabilities incurred by the business. 

LLCs also offer certain tax advantages and can be helpful for those actively involved in crypto. A crypto LLC, whether a crypto mining LLC or an LLC for crypto investing, will keep your crypto business activity separated from your personal finances, which can prove helpful during tax season.

LLCs provide the benefits and flexibility of a corporation without having to pay taxes at corporate and individual tax rate levels. LLCs combine aspects of general partnership taxation with elements of corporate taxation. 

Typically the LLC itself does not pay income taxes and is considered a pass-through entity. This means profits and losses are passed to the members, who then report them on their individual tax returns. 

There are some key benefits to creating a crypto LLC or corporation for your crypto business. Here are two major reasons to consider creating a crypto LLC.

• You may be able to write off tax losses from hacks
  Unfortunately, hacks and scams are not uncommon in the crypto space. While individuals cannot write off hacks and scams on their taxes, some LLCs or C-corps can.

• You can use losses to offset past or future capital gains 
  Unlike individuals, C-corps can carry back capital losses to offset capital gains. In other words, if a corporation's losses exceed its gains in a tax year, it can use the excess losses to offset previous years' gains.
  
  Losses are carried back a maximum of three years. If there are still excess losses, they can be carried forward for a maximum of five years. Any excess gains after being carried back three years and forward five years are lost forever.

Dive deeper with our crypto tax guide.

Along with benefits, there are some drawbacks to creating a crypto LLC or corporation. Here are a few possible issues to take into consideration.

• Incorporating can be complex
  The main drawback to creating a corporate entity for your crypto activities is the complexity. You may need to hire an attorney to help select a business structure and create the entity. Or, if your situation allows it, you can use an online platform like LegalZoom or RocketLawyer. Tax returns also become more complex, as you need to file taxes as a corporation.

• Incorporating can be costly
  Depending on the state in which you incorporate, you will have to pay for a registered agent and annual franchise fees. Annual fees can be from a few hundred dollars to up to $800 a year in California. 
  
  Additionally, because taxes are often more complicated for corporations, you'll likely have to engage the services of a CPA or EA with specific corporate tax experience.

• Incorporating is a commitment
  What if you don’t want to trade crypto anymore? Unwinding a corporation can be a lengthy process. 
  
  For instance, if you create a corporation in Delaware, you will need to file dissolution documents via physical mail and pay your fee with a physical check. There is no set timeline when you will get your response, so make sure you keep detailed records.

An LLC offers small business owners protection against certain liabilities while allowing profits and losses to pass through directly to its owner’s or owners’ personal taxes. 

On the other hand, a C-corporation is the traditional option for many businesses that offer stock options in their organizations. The downside is that these entities are subject to double taxation - once on the company's income and then on investors who receive dividends from profits. 

An S-corporation allows for no more than one hundred shareholders and provides similar tax treatment as LLCs, which means reported losses and profits could affect shareholders personally. 

Those with crypto-focused LLCs, and those considering starting one, should be aware that from January 1, 2024, the Corporate Transparency Act (CTA) will usher in new reporting obligations for many entities, including LLCs. This legislative framework casts its net over domestic and foreign entities operating within the United States, and its primary objective is to combat money laundering and illicit activities that often exploit shell corporations and similar entities.

Under the CTA, entities that fall under the “reporting companies” classification must conform to a series of mandates. Reporting companies will include domestic and foreign corporations, limited liability companies, and similar structures.

Existing reporting companies must furnish Beneficial Owner Information (BOI) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) by January 1, 2025. Reporting companies established or registered on or after January 1, 2024, have a 30-day window from their formation or registration acceptance date to report. Furthermore, any modifications concerning beneficial ownership or exemption status must be reported within 30 days of their occurrence.

In September 2023, FinCEN proposed extending the deadline for certain reporting companies to file their initial beneficial ownership information (BOI) reports. Under the proposed rule, companies created or registered in 2024 would have 90 days to file their initial reports instead of the previous 30 days. This extension aims to reduce the burden on reporting companies and promote compliance with the BOI Reporting Rule. Companies created or registered before January 1, 2024, would have until January 1, 2025, to file their initial BOI reports, while entities created or registered after January 1, 2025, would still have 30 days to do so.

Non-compliance with the CTA’s reporting obligations or unauthorized disclosure of BOI is met with the imposition of civil and criminal penalties. These penalties span from monetary fines to imprisonment and apply both to individuals and reporting companies. When in doubt, our crypto tax professionals at TokenTax are available to help clarify your obligations under this new requirement if you operate a crypto LLC.

Here are answers to some frequently asked questions about crypto business, creating an LLC for crypto mining, crypto trading and crypto LLC generally.

Do I need an LLC to mine crypto?

You do not need an LLC to mine crypto. However, having one can offer benefits. A crypto mining business structured as an LLC provides liability protection, enables you to deduct business expenses, and potentially reduces self-employment taxes

Can crypto be an LLC?

An LLC is a viable option for those who want to reduce personal financial liability and avoid personal responsibility in the event of bankruptcy or other legal situations. 

Crypto enthusiasts should note, however, that due to tax legislation surrounding crypto assets, LLC setup can be more easily managed with an attorney who specializes in finance and cryptocurrency. It's important to understand federal and state regulations that apply to both taxation and investing in cryptos when forming an LLC, whether it's a crypto mining LLC or an LLC for crypto investing. 

What does LLC mean in crypto?

A crypto LLC serves to protect its owners from personal liability and as a clean way to separate personal finances from those related to crypto business activity. An LLC for crypto investing allows you to write off casualty losses in the case of scams or wallet hacks.

Can you buy crypto under a business name?

The short answer is yes. In fact, it's actually highly recommended that businesses set up wallets with an associated business name for greater security and transparency. This is especially important if you plan on trading large amounts of currency since all your transactions will be grouped in one place. 

Buying crypto under your business’ name helps to separate your personal finance from your crypto business activity, which makes for easier reporting when tax season comes.

How do I buy crypto as an LLC?

Buying crypto as an LLC is more or less the same as when you buy as an individual. You simply acquire crypto through accounts associated with the LLC, as you would as an individual trader. Many popular exchanges support institutional accounts, including Coinbase, Kraken, and Binance.us.