If you’re like many people, you might be considering starting your own crypto LLC. In the case that you’re considering or already own and operate a crypto trade or business, it’s important that you understand the pros and cons that an LLC structure offers. From understanding the implications of your cryptocurrency taxes to understanding how to protect yourself from liability, our team at Founder’s CPA has outlined everything you need to know.
What Is an LLC?
A Limited Liability Company (LLC) is a legal structure that dictates how a business is owned and operated. This is a popular structure, especially for small businesses, as it helps to provide protection to its owners particularly in the case that any lawsuits or debts come about. This structure helps to protect your personal assets and ensures that you’re not personally held accountable for liabilities or debts that are associated with the business. In the U.S., LLCs are legally allowed to own and trade Ethereum, Bitcoin, and other forms of cryptocurrency. As a next step, let’s look at how these LLCs are taxed.
How Are LLCs Taxed?
There are certain tax advantages for LLC owners of which you should be aware. Specifically, crypto LLC owners have the flexibility and benefits that a corporation does without having to pay taxes at the same rate. An LLC combines some aspects of corporate taxation with general partnership taxation.
In most cases, an LLC doesn’t pay income taxes and is seen by the government as a pass-through entity. In other words, any profits or losses are passed to the members who report them on their individual tax returns. This means that any cryptocurrency taxes that you incur personally are separate from those of your crypto business.
Tax Benefits of Creating a Crypto LLC
Here are two major upsides to creating a crypto LLC.
- You might be able to write off tax losses that result from hacks: Anyone in the crypto space knows that scams and hacks are commonplace. Even though individuals aren’t allowed to write these events off in their taxes, it’s possible that some LLCs can.
- You can leverage losses to help offset future or past capital gains: LLCs are allowed to carry back capital losses to offset capital gains. This means that if your losses are more than your gains within a tax year, they can be paid to offset gains from the previous year.
Cons to Creating a Crypto LLC
Conversely, there are some possible downsides to creating a crypto LLC that you’ll want to consider.
- It can be complicated: Perhaps the main disadvantage to creating a corporate entity for your crypto activities is how complicated it can be. Some people prefer to hire an attorney to assist with this process. In return, filing cryptocurrency taxes becomes more complicated as well.
- It can be expensive: Although every state is different, it can still be expensive to register to become an LLC. Plus, you’ll need to factor in annual franchise fees.
Our Advice for Cryptocurrency Taxes
If you’re considering going down this road, don’t go through it alone. Our team at Founder’s CPA is here to help you through this process and ensure that you understand everything you need to know about your cryptocurrency taxes. Get in touch with us today to get started!