Creating an LLC or Corporation for Crypto: Pros & Cons
If you are trading, mining, or earning crypto, there could be benefits to creating a corporation or LLC for crypto. Learn more.
TokenTax content follows strict guidelines for editorial accuracy and integrity.
Crypto businesses can write off business-related expenses, but incorporating is also a commitment of time and energy.
If you’re professionally trading or crypto mining there could be tax benefits to setting up a business entity. In this article, we'll run through the pros and cons of creating an LLC or corporation (c-corp) for your crypto activities.
Tax Benefits of Creating a Crypto LLC or Corp
1. 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 hack and scams on their taxes, some LLCs or C-corps can. Contact a crypto tax professional with corporate tax experience for personalized guidance.
2. 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.
Downsides of Creating an LLC or Corp for Crypto
1. Incorporating can be complex
The main con 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.
2. 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.
3. 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.
For more info on crypto tax basics, visit our Crypto Tax Guide.
To stay up to date on the latest, follow TokenTax on Twitter @tokentax.