MicroStrategy might end up owing billions in taxes on its bitcoin profit which has hit over 18 billion even though it hasn’t sold any of the cryptocurrency.
This tax problem is caused by the corporate alternative minimum tax (CAMT) created by the 2022 Inflation Reduction Act, which imposes a 15% tax on financial statement income reported under GAAP rules.
According to WSJ report, the firm recently disclosed that its tax liability could increase to $4 billion and the CAMT might take effect next year if its average financial income exceeds $1 billion over three years.
Unlike individual Bitcoin holders, who are taxed only when they sell, MicroStrategy could be forced to pay taxes on paper-only profits.
The IRS did grant an exception to unrealized appreciation of stock value but did not mention Bitcoin. MicroStrategy has been pushing for the same treatment for cryptocurrencies, citing that “there’s no real difference in the accounting,” according to tax expert Robert Willens.
He believes it would be “easy to slot crypto assets into the same exemption” as stocks. However, he notes that “there’s no guarantee the IRS will agree.”
What further complicates MicroStrategy’s case is the recent changes in accounting regulation. Previously, Bitcoin was valued as an intangible asset, and only losses were reflected in financial reports. But starting this year, the company will now be required to report Bitcoin at a fair market price and then gains will now be reflected in earnings
If the IRS does not grant an exemption, MicroStrategy would be forced to sell some Bitcoin to fund its taxes, and this contradicts the narrative of holding cryptocurrencies long term. This situation also highlights the risk of paying taxes on volatile assets like Bitcoin and its price might drop after the taxes are paid.
The company’s filing on January 6 showed that it added $12.8 billion to its retained earnings under a new accounting strategy. MicroStrategy also trades at a premium to the value of its Bitcoin holdings, and this may affect how investors perceive the company’s approach.
The IRS is still finalizing the rules for CAMT, and MicroStrategy is hoping the IRS will provide relief. But the final decision on whether it will get an exemption for its Bitcoin holdings is still uncertain. As tax rules continue to evolve, MicroStrategy’s future strategy could be in limbo.
Also Read: MicroStrategy Shareholders Approve Bitcoin Investment Plan
