Hidden Danger Awaiting MicroStrategy’s Bitcoins: Donald Trump Could Step In

MicroStrategy, the software firm turned bitcoin investment powerhouse, is facing a major tax issue that could force it to rethink its longtime cryptocurrency accumulation strategy.

With a Bitcoin stash of about $47 billion and unrealized earnings of $18 billion, the company could owe billions in federal taxes as of early next year without ever selling a single Bitcoin.

This unexpected tax dilemma stems from the corporate alternative minimum tax (CAMT) introduced under the Inflation Reduction Act of 2022. Designed to ensure that companies pay a basic tax on their statement income, the CAMT sets a 15% tax rate based on adjusted earnings under generally accepted accounting principles (GAAP). While traditional investment gains are typically not taxed until realized, MicroStrategy’s significant unrealized Bitcoin gains put it in an unprecedented position.

MicroStrategy is seeking relief from the IRS, arguing that unrealized Bitcoin gains should be exempt from CAMT in the same way that unrealized gains from securities like stocks are treated under the proposed rules. While the IRS has created exemptions for companies with large holdings of common stock, such as Berkshire Hathaway, no such exemptions currently exist for cryptocurrency holdings.

Veteran tax analyst Robert Willens believes the IRS could ultimately side with MicroStrategy and exempt unrealized crypto gains from CAMT. However, he cautions that there is no certainty, especially given the political climate. “If the Biden administration was still in office, they probably wouldn’t get the exemption,” Willens said. Donald Trump’s crypto-friendly rhetoric could also help. He also suggested that it would be simple to extend the same exemption for stocks to crypto, since the two share similar accounting treatments.

The potential tax liability puts MicroStrategy in a precarious position. The company, which has a market cap of $92 billion, relies heavily on its Bitcoin holdings for value. If it were to pay taxes on unrealized gains, MicroStrategy would be forced to sell some of its Bitcoin to cover the bill, undermining its core strategy of holding Bitcoin as a long-term store of value. The tax burden could also weigh on the company, as its other businesses are not profitable.

Such a scenario could also make MicroStrategy an inefficient vehicle for investors looking to invest in Bitcoin. “Paying taxes on paper gains that could be lost if Bitcoin’s value declines would essentially turn this into a wealth tax,” Willens said.

*This is not investment advice.