How to invest in Bitcoin as a corporation and handle tax considerations.

In the past few months, a new narrative has emerged. The increasing interest of institutions and companies in bitcoin and other cryptocurrencies. Recent mega-purchases of bitcoin by Square ($50 million) and Micro Strategy ($435 million) created global news and brought this to everyone’s attention. However, this pattern began much earlier beneath the surface during the 2018 bad market.

Top-tier VC companies such as Andreesen Horrowitz (a16z) doubled down on their crypto wager while the majority of the world lost interest in cryptocurrencies and closed two dedicated crypto funds with over $815 million in capital commitments. Equally renowned is the tale of Paradigm, which persuaded elite institutional investors such as Harvard and Stanford to grant them $750 million to invest in a market they were too prestigious to enter. In 2018, Paradigm put its whole original cash in Bitcoin and Ethereum at bubble-burst discount pricing.

Obviously, these investments have been profitable. The value of Bitcoins and Etherum has more than tripled since investments by Paradigms and a16z. MicroStrategy’s bitcoin investment has increased by $100 million since its purchase one month ago. And the area has gained odd new allies: in May, billionaire Paul Tudor Jones stated he was purchasing Bitcoin as a hedge against inflation, and in the summer, J.P. Morgan, Mastercard, and Visa all disclosed their crypto ambitions.

Why should businesses invest in cryptocurrency?

As a new asset class, Bitcoin required time to develop a price history and a sense of its cycles. Today, the majority of experienced investors comprehend crypto’s value proposition and view it as a welcome asset to increase and diversify their mostly fiat-denominated portfolios. Moreover, given the current environment of negative interest rates, storing cash has become costly for businesses. Consequently, investing in bitcoin and other cryptocurrencies becomes increasingly logical.

Bitcoin as a value storage (also known as “digital gold”)

The ability to move purchasing power over time and space is one of the basic purposes of money.

For millennia, gold has been regarded as a store of value. Gold’s reputation as a store of value is mostly due to the rarity of its supply on Earth. The confidence in its store of value qualities is based on humanity’s understanding of nature, namely that gold is scarce and cannot yet be synthesized cost-effectively.

Additionally, well-established fiat currencies such as the U.S. dollar and the Euro can be regarded as valuable stores of value. The confidence in fiat currencies rests on government credibility (e.g., to wisely manage their monetary policy). There is both efficiency and risk associated with placing so much trust in a single institution. Through the acts of the government, fiat currencies can lose credibility and be devalued. In times of crisis, the government may confront short-term demands that override concerns for long-term credibility.

In contrast to gold, the US Dollar is a centralized monetary asset that can be devalued by a single actor, whereas gold is a decentralized monetary asset that cannot be discounted.

Now, Bitcoin and gold share this and numerous other traits. Bitcoin, like gold, has a limited supply. The current Bitcoin supply is close to 19 million. Asymptomatically, its lifetime population will surpass 21 million. Achieving digital scarcity was Bitcoin’s greatest technological achievement (building on decades of computer science research). Bitcoin is arguably rarer than gold because its total supply on earth can only be estimated – it is not known for definite. New discoveries are constantly reported in the media (Elon Musk wants to mine gold on Mars!).

Moreover, similar to gold, Bitcoin is difficult to mine. Within the Bitcoin network, miners must utilize computing power to validate transactions. The process is both energy and hardware heavy.

In contrast to gold, bitcoin is digital, portable, and resistant to censorship. Digital currency is less expensive to keep and easier to transmit than gold, which is physically bulky. In times of capital controls or expropriations where Bitcoin cannot be taken since it is moved across a peer-to-peer network and held in private bitcoin wallets inaccessible to everyone but the owner who possesses the private keys, these qualities are extremely valuable.

Bitcoin shares many parallels with actual gold, but also possesses a number of characteristics that gold does not. In a digital-first, worldwide society, certain characteristics are becoming increasingly important. Bitcoin is newer, has a smaller market value, and its upside and negative potential is more explosive. Known as an asymmetric wager.

How can a firm acquire Bitcoin?

Those who have never purchased bitcoin or other cryptocurrencies may find this question intimidating. Where to acquire bitcoin, how to purchase it, and where to store it.

The most prevalent way to get bitcoin is through a cryptocurrency exchange. Users can move funds into their account by bank transfer and make orders on their order book, just as they would with a standard brokerage account.

1. Create a business cryptocurrency exchange account

Signing up for a cryptocurrency exchange that offers specialized corporate accounts, such as Gemini, Kraken, Coinbase, or River, is the initial step required to purchase bitcoin as a business. This is significant because allowing “others” to purchase assets under the company’s name is significantly more difficult under many international laws.

Therefore, opening a personal account and trading under the company’s name is not a good idea, as it could greatly complicate your tax reporting and introduce new tax issues surrounding your crypto holdings. Additionally, you will typically enjoy higher funding limits and superior customer service compared to a personal account.

2. Buy Bitcoin

The second step in purchasing Bitcoin as a business is placing the order. You must initially transfer funds (euros, dollars, etc.) from your business bank account to the exchange. Some corporate bank accounts prohibit transactions to and from cryptocurrency exchanges; therefore, you should investigate your bank’s position on cryptocurrency exchanges beforehand.

After the funds have been deposited on the exchange, you must place your order. There are, generally speaking, two types of orders. If you want to just buy at the current bitcoin price, you submit a “market order” (which is simple), however if you want to buy at a certain price, you submit a “limit order.”

Market orders vs. Limit orders

When you submit a’market’ order, the exchange analyzes the current sell orders in the orderbook to determine the price at which your buy order will be automatically completed. As a user, you need merely input the amount you wish to purchase and click the “buy” button.

Pros: Simple and Convenient.

Cons: Expensive for bulk purchases. Most likely, the price will climb as your order is executed. This is because once you cease purchasing from “cheap” suppliers, you progressively transition to “expensive” sellers. This indicates that there is no fixed price for your transaction.

In contrast, if you manually create a ‘limit order,’ you indicate the price at which you are willing to purchase, and you create a new order in the orderbook. Your order will be “filled” once a corresponding sale offer has been received.

Pros: More control and a reasonable fixed pricing for bulk purchases

If market prices increase and your bid is too low, your order may never be filled.

If you are interested in purchasing large sums of bitcoin (> $100,000), a third alternative is to approach an OTC desk. Imagine an over-the-counter (OTC) counter that functions similarly to a concierge or VIP service, allowing you to place personalized orders with a fixed price. In this instance, the trade is not finalized through the orderbook, but rather privately. Most cryptocurrency exchanges have their own OTC desks, however there are also specialized OTC desks, like as Genesis, that solely service institutional clients and do not accept retail customers. Many institutional purchasers like OTC marketplaces because they desire to remain anonymous and have their orders quickly executed. When using an OTC desk, you can call or email your contact person to negotiate a predetermined price (for instance, “Bitstamp rate plus 1 percent”).

3. Protect your bitcoins

Once you obtain bitcoins on an exchange, you have two storage options.

1) Third-party custody: leave them with the exchange where you purchased them.

2) Self-Custody: Withdraw from the exchange and store in your own bitcoin wallet.

You may wonder, what is the difference between third-party custody and self-custody? Users may truly self-custody their digital assets, which is one of the innovations of cryptocurrencies such as bitcoin. Users store their bitcoin in a bitcoin wallet, which is responsible for managing the user’s private key and signing transactions. Before adding a new transaction to the Blockchain, bitcoin miners verify that the transaction is signed by a valid private key that corresponds to the bitcoins involved in the transaction. Bitcoin is therefore more similar to cash than a digital dollar in a bank account, which is merely a promise to get a real $1 from the bank when requested. Bitcoin eliminates the need for intermediaries between consumers and their assets.

However, bitcoin’s independence comes with a measure of responsibility. No one can retrieve your cash if you lose your private key since no third party stores a backup on your behalf. While the money remain on the blockchain, the power to move and manage them is gone as soon as the private key is no longer available. Especially in the early days of bitcoin, considerable amounts of money were lost in this manner.

If you choose self-custody, the best way to safeguard your company’s bitcoins is to acquire a bitcoin hardware wallet. A hardware wallet is a small device that stores your private keys offline, removing the majority of hackers’ attack vectors. When sending bitcoin, you link your hardware wallet to an app on your computer and use the hardware wallet to sign transactions in conjunction with the app.

Those who do not want this duty have the option of leaving their bitcoins in the custody of the exchange where they were purchased. As the central component of their infrastructure, top-tier exchanges have invested millions in protecting their storage systems. In addition, several of the leading cryptocurrency exchanges have insurance coverage in the event that they are hacked. However, prior to pursuing this path, you should examine the security page of the cryptocurrency exchange you’re contemplating to gain a better understanding of their security methods. There have been countless instances where offshore crypto exchanges with poor security have been compromised. Find a crypto exchange with a spotless track record and do not compromise on safety.

What are the tax consequences of holding bitcoin as a business?

As cryptocurrencies gain widespread acceptance as a store of value, taxing authorities throughout the world have enacted a variety of taxes rules. Every country has its own tax code that applies to corporations situated inside its jurisdiction. Although there is still a great deal of ambiguity surrounding bitcoin tax regulations, it is becoming increasingly vital for businesses to comprehend the taxes rules and regulations that apply to cryptocurrency transactions in their country. For illustrative reasons, we have compared relevant tax guidance in the United States, Germany, and the United Kingdom.

USA

Before investing in Bitcoin, American corporations must understand the tax ramifications. The simple exchange of USD or any fiat money for Bitcoin is not a taxable event. When a company holds Bitcoin for investment purposes, there are additional financial reporting issues that must be taken into account.

Taxable Events

When Bitcoin is sold for USD or another fiat currency, a taxable event occurs. Notice 2014-21 provides updated tax guidance for individuals and corporations regarding the tax treatment of cryptocurrency transactions. The guidance classifies cryptocurrencies as property, therefore the tax principles applicable to property or barter transactions also apply to transactions involving cryptocurrencies. There are additional state-specific regulations with cryptocurrency transactions, so be sure to consult a local tax expert.

Tax Liability

The tax liability associated with Bitcoin transactions is proportional to the amount of gain or loss recognized. When you sell Bitcoin for more than you spent to acquire it, you realize a capital gain (capital gain = sale price – cost basis). The cost base is the USD amount you spent in addition to any fees, commissions, and other acquisition expenses. A loss is recognized when the cost base exceeds the selling price.

For tax purposes, corporations can offset gains with losses. The net capital gains of a corporation are added to its ordinary income and taxed at ordinary rates. These losses cannot be deducted in the current year if the total capital losses exceed the total capital gains. The excess losses are carried back for a maximum of three years and then carried forward for five years to counter only capital gains.

Reporting Tax

On your tax return, you must disclose cryptocurrency sales using Schedule D and Form 8949. As instructed, you will display your capital gain or loss calculations directly on the form.

This section is provided by Maria Okeke, Director of Finance at River, a bitcoin exchange in the United States that caters only to institutional clients.

Germany

A German corporation that is contemplating cryptocurrency as an investment should be aware of its tax implications. The distinction between personal and business assets is vast. All the rumors you may have heard, such as business assets being tax-free after one year, are false.

Taxable Events

There is no idea of a taxable event for company assets in Germany. A German company must account for these assets in their books. Every transaction must be recorded in the accounting records. Therefore, whether this is a purchase or a sale, it must be shown in the company’s accounting. At the end of the year, the profit and loss will be computed based on the balance sheet’s comprehensive listing of the company’s assets.

To be included in a balance sheet, cryptocurrencies must represent an asset in accordance with the principle of completeness from 246 para. 1 sentence 1 HGB. German business law does not specify the qualities a right or property must possess in order to be classed as an asset. In the interim, however, it has been widely accepted that the criterion of individual saleability is the defining quality for classification.

Important to the appraisal of an asset is the part of the balance sheet under which the item appears. Due to the lack of currency and securities properties as required by 2 Paragraph 1 of the German Securities Trading Act, only the item “other assets” remains as a disclosure option in the current assets (WpHG). Gold and silver coins, for which a cash feature is likewise denied, are also required to be declared.

Tax Liability

The tax liability relies on the balance sheet value of the assets. In general, all cryptocurrencies are accounted for according to the lowest value principle.

The lowest of three possible values, acquisition or production costs, stock exchange or market price, and the value to be attributed at the date of the balance sheet, must always be assigned to current assets. Unlike unrealized profits, unrealized losses are reported when assets are valued according to the lower of cost or market principle.

Reporting Tax

The cryptocurrency holdings must be recorded on the balance sheet. Continually, all transactions must be recorded and maintained for any tax office inquiries.

This section is contributed by Werner Hoffmann, the founder of Pekuna, a German corporation that specializes in all aspects of crypto currency taxation and reporting.

UK

The bitcoin industry, underlying technology, and applications are expanding at a rapid rate. In order to maintain appropriate compliance and reporting, the accounting and tax treatment have also had to evolve. On November 1, 2019, the Internal Revenue Service (IRS) issued recommendations for firms doing bitcoin transactions.

Taxable Events

A company established in the United Kingdom pays corporation tax on income made from:

Conducting business (Trading profit)

2. Investment gains and income (Loan Relationship)

3. Taxable gain on the sale of assets (concrete and abstract)

The profit will be included in the trading profit if the corporation held cryptocurrency as part of the existing deal. In the United Kingdom, cryptocurrency is not considered a currency. In addition, there is often no counterparty in bitcoin transactions, so cryptocurrency investments do not fall under the loan relationship requirements. A corporation has a “loan relationship” if it owes money due to a transaction involving the lending or borrowing of funds.

Cryptocurrency is considered an intangible asset, and hence a chargeable asset for tax purposes in the United Kingdom, as it satisfies the two following criteria:

1. It is something that is susceptible to ownership and

2. It is capable of realizing its value.

This means that if the company held bitcoin as an investment and not as part of its trade, the disposal of the cryptocurrency will result in a taxable gain/loss.

Tax Liability

If the company realizes a chargeable gain from the sale of cryptocurrencies, it does not owe capital gains tax; instead, it pays corporation tax (19% depending on the tax rate for fiscal year 2019-20). A ‘disposal’ is a broad term that encompasses:

1. Exchange of bitcoin for fiat currency

Exchanging digital currency for another digital currency.

3. Using cryptocurrencies as a means of payment

Donating or gifting cryptocurrency to another individual or organization.

Reporting Tax

Calculating a company’s taxable profits must be done in the company’s functional currency, which for UK-based businesses is typically the pound sterling. The rationale for conversion should be appropriate and consistent. Profits and gains are subject to Corporation Tax for corporations. Therefore, the gain or profit from cryptocurrency-related activity must be shown in the company’s financial accounts. Financial reporting and Corporation tax reporting will adhere to the company’s financial period-based reporting schedule.

This section is provided by Shukry Haleemdeen, founder of MyCryptoTax, a UK company dealing in all aspects cryptocurrency taxation and reporting.

Facilitating your organization’s crypto tax declaration

There are a growing number of companies and services that assist with the taxes of cryptocurrencies. In general, two sorts of services exist: tax calculators and bitcoin accounting tools.

Connecting your company’s bitcoin wallet addresses and crypto exchange accounts enables you to track the performance of your crypto assets in a centralized location. Then, you can use your crypto trading history to automatically populate your country’s needed tax forms for reporting capital gains. You can attach the completed tax forms to your tax return or import them directly into your tax preparation program. The majority of these tools also calculate unrealized gains and losses, which aid “tax loss harvesting” methods, which involve selling assets at a loss to lower taxable gains.

TokenTax, Zenledger, Taxbit, and Cointracking.info are tax calculator applications.

SoftLedger and Cryptio, on the other hand, are accounting platforms that turn crypto transactions into data that can be used for accounting and finance. Cryptio integrates your cryptocurrency exchange accounts to your organization’s general ledger software and automatically tracks and labels every cryptocurrency purchase and payment. You can upload an account structure and allocate transactions to certain accounts. Once transactions are categorized, the platform generates standard files that can be imported by the majority of general ledger software. SoftLedger is a comprehensive general ledger technology designed exclusively for cryptocurrency transactions. After connecting your cryptocurrency wallets and exchange accounts, the software enables reporting on realized and unrealized gains and losses, as well as tracking of cost basis.

Accounting software: SoftLedger and Cryptio

Conclusion

The infrastructure surrounding the acquisition, storage, and accounting of crypto assets has matured significantly during the past few years. MicroStrategy, Square, and a number of funds have demonstrated that investing in bitcoin is profitable and feasible from an execution standpoint. We anticipate that an increasing number of businesses will be interested in the logistics of purchasing Bitcoin and other crypto assets, and we hope that this post will serve as a resource.

Notice: crypto testers does not provide investment, financial, tax, or legal advice. The offered material is generic and illustrative; consequently, it is not meant to provide tax advice and should not be relied upon as such. We advise you to visit the right tax professional in order to comprehend your unique tax situation.