The Hidden Danger Awaiting MicroStrategy’s Bitcoins: Donald Trump May Step In!

Bitcoin MicroStrategy, a software company that has become an investment center, has been crypto para It faces a significant tax challenge that could force it to rethink its savings strategy.

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

This unexpected tax dilemma arises from the corporate alternative minimum tax (CAMT) introduced under the Inflation Mitigation Act 2022. Designed to ensure that companies pay a basic tax on financial statement income, CAMT sets a 15% tax rate based on adjusted earnings under generally accepted accounting principles (GAAP). While traditional investment gains are generally 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 such as stocks are treated under the proposed rules. While the IRS has provided exemptions for companies that hold large amounts of common stock, such as Berkshire Hathaway, no such exemption currently exists for cryptocurrency holdings.

Robert Willens, a veteran tax analyst, believes the IRS may ultimately side with MicroStrategy and exempt unrealized crypto gains from CAMT. However, he warns there are no certainties, 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 cryptocurrency-friendly rhetoric may also help in this regard. He also suggested that it would be simple to extend the same exemption for stocks to crypto, as both share similar accounting treatments.

The potential tax liability puts MicroStrategy in a precarious position. The company, which has a market capitalization of $92 billion, relies heavily on Bitcoin holdings for value. If it had to pay taxes on unrealized gains, MicroStrategy might have to sell some of its Bitcoin to cover the bill, an outcome that would undermine its core strategy of holding Bitcoin as a long-term store of value. Additionally, the tax burden may further burden the company since its other business activities are not profitable.

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

*This is not investment advice.