The 2018 federal tax reform came with some hefty corporate tax cuts. As a result, there are lots of rumors circulating about being able to avoid tax liability by incorporating and managing their financial assets through a corporation or an LLC.
If you have a lot of self-employment income, then you may benefit from forming a corporation. The new corporate tax rate is only 21 percent for C Corps, which is much lower than the tax rates applied to high-income individuals.
The real question is can your cryptocurrency activities fit into a corporation.
Small Business Cryptocurrency Activity
If you are mining or trading as a business, you may see some benefits from using a corporate structure. You get two main benefits from the corporate structure.
- Simplified reporting for active traders. If you hundreds of trades a month it can become time-consuming to make sure you’re reporting it accurately. On a personal level, you are required to report every single transaction, line by line. If you are trading through a corporate structure, you are in the business of buying and selling intangible assets. Just like any other business that buys and sell property. Your reporting is much simplified as you focus more on the actual revenue generated.
- Fringe benefits – As a corp, you have options to set up some decent fringe benefits. The biggest ones fall into the retirement accounts. The amount you can contribute is significantly higher than for an individual. Some even allow you to hold cryptos in them, so you get the best bang for your buck.
- Potentially a deduction on Qualified Business income from the new changes in 2018. It is still unclear if this applies to crypto activities. If it does it could provide some tax rate benefits as well.
Both of these of these sound great so what are the trade-offs?
Downsides of Incorporation for cryptocurrency activity
Nothing is free so to speak. There is a cost associated with every choice we make in our tax lives. So what are the downsides to using a corporation?
- Two sets of tax returns. In most cases, if you incorporate you will be required to file two sets of tax returns. One individually and one for the corporation.
- Limited number of exchanges – To trade as a corporation you need an institutional account. This limits the number of exchanges that you would qualify for
- Loss of long-term capital gains rates. This is a big one depending on your strategy in your crypto activities. Long-term capital gains rates are lower than you would pay on most corporate income.
- Year-end close out – You don’t hold gains in a company. At the end of the year, you have to treat your inventory of cryptos as if they were all sold. Unlike an individual where you only have to do this when you sell or swap your coins.
- The potential for double taxation if you are a C-Corp. C corps pay their own taxes and then issue dividends. When you receive a dividend, you have to pay taxes on that as well. So the overall tax rate may end up being the same as if you just traded it individually.
You should never pay more than you owe to the IRS. If you’ve bought or sold virtual currencies this year, consult with a trained professional to make sure you’re not exposing yourself to excess liability. Happy Tax employs the most skilled and experienced Certified Public Accountants to prepare your tax returns, and the company also trains them to be up-to-date with current laws and policies impacting cryptocurrency investors. Rather than going through the frustration and expense of trying to prepare your cryptocurrency tax reporting on your own, contact the skilled cryptocurrency tax experts at Happy Tax today.