Learn everything you need to know about crypto tax in our Cryptocurrency Tax Guide
Creating a LLC or Corporation for Cryptocurrency
What are the pros and cons of creating a corporation for crypto activities? If you’re interacting with crypto assets in a variety of ways, like trading, mining, or earning it in any other way, then there could be benefits to creating a corporate structure.
Writing off casualty losses
Unfortunately, losing crypto due to hacks or scams is common in the space. Just in 2019, we have seen high-level crypto hacks happen at major exchanges such as QuadrigaCX, Bithumb, and Cryptopia amounting to millions in losses.
As of 2018, individuals cannot write off these losses as casualty losses. That benefit is only for corporations now. So if you traded on these exchanges as part of your LLC or C-Corp, you can write these losses off on your taxes. As an individual, you are not able to.
If you lost crypto as part of a major disaster, you are still able to write off the casualty loss. An example is if you lost your cold storage wallet during a major hurricane.
Crypto and mining income can be offset by capital losses.
Let’s say you mined $100,000 worth of ETH at the beginning of 2018 and didn't sell until the end of the year, and now that $100,000 worth of ETH is only worth $10,000. Your loss of $90,000 is a capital loss, but the $100,000 you mined is considered income, so you cannot net them off.
You will still need to pay taxes on that $100,000 even though you only were able to cash out $10,000. If you trade under a corporation, you would be able to use that capital loss of $90,000 to offset that $100,000 in income.
Cons Complexity and Costs
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. If you’re savvy, you can use an online platform like Legalzoom or RocketLawyer to create an entity for less than $500.
Additionally, depending on the state 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.
Taxes also become more complex, as you need to file taxes as a corporation. You are more likely to need a CPA with specific corporate tax experience, and this CPA will be at a premium.
What if you don’t want to engage in crypto activities 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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