Learn everything you need to know about crypto tax in our Cryptocurrency Tax Guide
If you’re professionally trading, mining, or earning crypto, then there could be benefits to creating a corporate structure. 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 related losses as casualty losses, some LLCs or C-corps can. Contact a 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 a Crypto LLC or Corp
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 create the entity. Or, if your situation allows it, you can use an online platform like Legalzoom or RocketLawyer. Taxes 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.
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