MicroStrategy looks to Trump’s pro-crypto administration to solve its tax problems

MicroStrategy has spent years raising money via stock and debt offerings to buy Bitcoins. Now, the company is one of the largest holders of the asset, with a stash worth about $47 billion and about $18 billion in unrealized gains. 

The business analytics software company has achieved success with its business model, but it has hit a roadblock recently. It may have to pay federal income taxes on its paper gains even if it never sold a single Bitcoin. 

According to a new disclosure by MicroStrategy this month, the amount the company will pay in taxes could run into billions by next year. 

Joe Biden’s administration continues to hobble MicroStrategy 

Under normal circumstances, investment gains aren’t taxed until the assets are sold. But in 2022, the Inflation Reduction Act was passed, which saw Congress create a “corporate alternative minimum tax” that has now trapped MicroStrategy. 

The tax rate would be 15%, based on an adjusted version of the earnings that MicroStrategy reports on its financial statements under generally accepted accounting principles. The only feasible way to avoid full exposure is if the Internal Revenue Service (IRS) adopts new rules that let MicroStrategy off the hook.

The IRS already has written exemptions into the currently proposed rules so that companies like Berkshire Hathaway can avoid paying taxes on unrealized gains from securities such as common stocks. 

However, the IRS did not include companies’ unrealized gains on crypto assets, such as Bitcoin.

MicroStrategy has reportedly opened communication lines with the IRS, and given the new administration’s crypto-friendly reputation, a suitable resolution could be on the cards. At least, the odds have dramatically improved compared to Joe Biden’s tenure.

The IRS is still in the process of drafting rules to implement the new corporate alternative minimum tax.

Observers believe the IRS’s decision will favor MicroStrategy 

Robert Willens, a longtime tax analyst who has been monitoring MicroStrategy’s issues with the IRS, believes the tax regulator will decide in the company’s favor and exclude unrealized gains on cryptocurrencies under its proposed rules. He also added the caveat that there are no guarantees on the outcome. 

“If the Biden group was still in place, they probably wouldn’t get the exemption,” he said, adding that “it would be easy to slot crypto assets into the same exemption that stocks are going to enjoy because there’s no real difference in the accounting.”

If MicroStrategy has to pay taxes on unrealized Bitcoin gains, the company might have to liquidate some of its holdings to raise funds because its other businesses aren’t nearly as profitable. 

If that happens, it would defeat the purpose of MicroStrategy’s Bitcoin roll-up strategy and make the company one of the least tax-efficient ways for investors to get exposure to Bitcoin.

New rules affecting Bitcoin-holding companies

One reason the U.S. enacted the corporate alternative minimum tax was to control companies that aggressively recognize earnings for GAAP purposes while showing little or no taxable income on their IRS returns. 

In MicroStrategy’s case, the company could get slammed with the equivalent of a wealth tax, which means it will be paying taxes on paper gains that could prove transitory if Bitcoin’s value falls.

In the past, companies that owned crypto assets didn’t have to report them at fair market values on their GAAP financial statements. The accounting rules instead treated cryptocurrencies as intangible assets that could be written down in value rather than up. 

As a result, MicroStrategy didn’t include the unrealized gains from its Bitcoin holdings in its GAAP earnings. However, that will change this year thanks to the new rules passed by the Financial Accounting Standards Board, which sets U.S. GAAP. 

Starting this year, MicroStrategy must show the fair value of its Bitcoins on its balance sheet, and fluctuations in value will be included in earnings.

MicroStrategy revealed numbers quantifying the impact of the tax and accounting changes for the first time in a January 6 filing . It said it would add as much as $12.8 billion to its GAAP retained earnings, effective January 1. 

That amount is a component of shareholder equity and will be part of the calculation when determining its financial statement income for purposes of the corporate alternative minimum tax.

The company has also vowed to increase its GAAP deferred tax liabilities by as much as $4 billion. That estimate can be considered a rough guide for the total tax bill MicroStrategy might have to pay, assuming Bitcoin’s price remained unchained since the end of 2024.

Microstrategy has said it could become subject to the corporate alternative minimum tax from 2026. The 15% minimum tax would apply if its average annual financial statement income exceeds $1 billion over a three-year period before the initial tax year.

Since those using MicroStrategy as a vehicle to access Bitcoin are not buying with their own accounts, if the Bitcoin the company buys goes up in value, it will have to pay taxes on the gains even when it has not sold anything. 

This is exactly the dilemma MicroStrategy needs Trump’s crypto-friendly SEC to help it solve, but as Willens said, there are no guarantees that things will work out the way they hope. 

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