What is an LLC?

A Limited Liability Company (LLC) is a legal business entity that provides personal liability protection to its owners (known as members). Typically, the personal assets of each member remain separate from the business’s liabilities, debts, and lawsuits. Many crypto entrepreneurs choose LLCs because they’re relatively flexible, straightforward to set up, and can offer certain tax advantages.

How are LLCs taxed?

By default, LLCs are treated as pass-through entities. Profits and losses flow through to the members, who report them on their individual tax returns. However, depending on your needs, an LLC can elect to be taxed as an S-corporation or C-corporation instead.

Single-member LLCs

• Treated as a disregarded entity for tax purposes.

• Income and expenses from crypto flow directly onto the owner’s personal tax return (Schedule C).

• Even if you don’t distribute profits to yourself, you’re taxed on any net income at year’s end.

Multi-member LLCs

• Viewed as a partnership by default.

• Must file an informational return (Form 1065) to show total income/loss.

• Each member receives a Schedule K-1 outlining their share of profits or losses.

• Members report these amounts on their personal returns, whether or not they actually receive a distribution.

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Starting a crypto LLC or Corporation: pros and cons

If you’re considering setting up a business entity for your crypto activities, here are a few benefits and drawbacks to keep in mind.

Pros

• Liability protection: Your personal assets are generally separate from any corporate obligations or debts.

• Potential business deductions: If you qualify as a crypto “trade or business,” you may deduct expenses related to your operations (e.g. software, equipment).

• Professional structure: Demonstrates legitimacy if you’re working with partners, investors, or clients.

• Privacy: Certain registrations allow minimal disclosure of personal info, depending on your state of formation.

Cons

• Formation and maintenance fees: You’ll need to pay filing costs and potentially annual state fees.

• Complexity: You must keep detailed books, file separate returns, and follow specific regulations.

• No automatic tax savings: A single-member LLC, taxed as a disregarded entity, won’t necessarily lower your overall tax liability.

• Potential double taxation: If electing C-corp status, income may be taxed at both corporate and personal levels.

Tax benefits of creating a crypto LLC or corp

Establishing a business entity can potentially open doors to tax advantages, provided you meet the criteria of running a genuine trade or business.

• Deductible expenses: Whether you rent an office space or buy specialized mining hardware, legitimate business costs can be deducted.

• Casualty or theft losses: In the event of hacks or scams, recognized business losses may be deductible.

• Retained earnings: A C-corporation can leave some earnings in the corporation, potentially taxed at a lower corporate rate if you’re planning to reinvest.

• Flexible taxes: LLCs can choose partnership, S-corp, or C-corp taxation, which can be leveraged for strategic tax planning.

Downsides of starting a LLC or corp for crypto

While an LLC or corporation may provide benefits, it’s not always the perfect fit.

• Setup and admin costs: Expect registration fees, annual reporting, and potential franchise taxes (in some states).

• Separate bank accounts: You must maintain clear separation of personal and business funds to preserve liability protections.

• Ongoing compliance: You need to file additional forms like Form 1065 for multi-member LLCs or a corporate return (Form 1120).

LLC vs. C-corporations vs. S-corporations

Below is a quick comparison of the different entity types and their primary tax and ownership considerations.

New LLC beneficial owner information (BOI) reporting requirements

This legislation is in flux. Learn more in our BOI reporting article and on the FinCEN website.

Use our free crypto tax calculator.

More ways to reduce my crypto tax liability?

Beyond forming an LLC or corporation, you can consider:

• Tax-loss harvesting: Intentionally sell at a loss to offset gains.

• Donating crypto: Potentially claim itemized deductions for qualified charitable gifts.

• Retirement accounts: Explore self-directed IRAs or 401(k)s for tax-advantaged crypto investing.

Learn how to reduce your crypto taxes.

About the 2023 FASB accounting standards update for crypto

In 2023, the Financial Accounting Standards Board (FASB) issued guidance requiring fair value accounting for certain cryptocurrency holdings. While the rules were published in 2023, they officially become effective for fiscal years beginning after December 15, 2024.

In practice, many companies will start applying these standards in 2025. Smaller LLCs or corporations might be less affected than large public companies. Still, if you work with external auditors or investors, you may need to consider these fair value disclosure rules when preparing or presenting financial statements.

So far, no newer FASB updates have been released. Future changes would likely build on or refine these fair-value principles introduced in 2023.

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