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Guide to Owning Crypto in an LLC: Benefits, Risks, and Tax Tips

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Guide to Owning Crypto in an LLC: Benefits, Risks, and Tax Tips
As a crypto trader or crypto business you may want to consider an LLC to streamline taxes and protect assets. Here's what you need to know.
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While LLCs can own crypto just like any other asset, opening and maintaining a company isn’t a choice that should be taken lightly. In this guide, you’ll learn the benefits and discover the potential downsides of owning crypto in an LLC.

Benefits

  1. Liability protection
  2. Ease of transfer
  3. Assign ownership to multiple parties
  4. Separation of ownership and management
  5. Potential tax benefits

Downsides

If it turns out forming an LLC is right for you, we’ll also provide a step-by-step guide on how to form one and transfer your existing crypto assets into it.

Benefits of holding crypto in an LLC

Liability protection

An LLC literally stands for “limited liability company” and as such owners in the company are not personally liable for business debts and obligations. However, it is important to note that the limited liability can be removed if the individual and company do not maintain separate financial records, bank accounts, wallets or any other core business infrastructure.

Ease of transfer

In an LLC, the ownership of the crypto assets is vested in the company itself, rather than in the individual. This means that transferring the assets from one person to another within the LLC structure can be done relatively easily.

For example, if you wanted to transfer crypto assets to a business partner or family member who is not yet a part of the LLC, you would simply update the ownership records within the LLC. Whereas if you were to hold the crypto assets as an individual, you would need to perform a transaction on the blockchain.

Assign ownership to multiple parties

An LLC can have one or more owners, known as members. Ownership is divided among these members and each can hold a specific percentage.

For example, if you and a business partner both wanted to invest in crypto, you could form an LLC and each hold a percentage of ownership in the LLC. This would give you both a shared ownership of the crypto assets held within the LLC structure.

Separation of ownership and management

The partners in an LLC are the owners. However they can also choose to appoint CEO, CFO, etc. This is not available to sole proprietorship firms.

Potential tax benefits

One of the main benefits of an LLC is that as a separate entity it can be taxed differently than an individual, possibly resulting in a lower overall tax bill for the LLC and its owners. A big advantage is more expense write-offs are available. For example, unlike individuals, company owners can write-off their losses related to events such as scams or wallet hacks. LLC taxes are discussed in depth below.

How LLC taxes work

The taxation of LLCs depends on how the LLC is classified for tax purposes. The rules differ for single-member and multi-member LLCs.

Single member LLCs

An LLC with one member is taxed as a sole proprietorship. The sole member of the LLC is required to report profits (or losses) as income on their individual tax return (Form 1040).

Multi-member LLCs

An LLC with multiple members is taxed as a partnership based on each owner's share of profit. The business income is not taxed at the corporate level but instead "passes through" the business to the individual owners, who report their share of the profits or losses on their personal tax returns.

Multi-member LLCs are also required to file IRS Form 1065 to ensure each owner has filed their taxes accurately. Owners should also be provided with Form K-1 by the LLC containing the details of their share in business profits and losses.

The LLC will be required to file IRS Form 1065 and provide both members with Form K-1.

The $50,000 of income from the LLC is considered "pass-through" income and is subject to personal income tax rates of the members. In addition, each member may also be subject to self-employment tax if they are actively involved in the management of the business.

Downsides of holding crypto in an LLC

Forming and maintaining an LLC can be expensive

Forming an LLC can be expensive and time-consuming. Ongoing maintenance costs, such as filing fees, tax attorneys, accountants and the cost of filing annual reports, can add up.

Record keeping

LLCs are required to maintain books of accounts separate from their owners. Not maintaining separate books can lead to owners being personally liable for the debts and obligations of the LLC.

By holding crypto you’ll need to know the cost basis for every token or coin gifted (or airdropped), bought, exchanged, or sold throughout the tax year. Tracking and reporting your crypto transactions is something we know a lot about at Bitwave. Learn more about our crypto bookkeeping software.

Insurance considerations

The insurance market for crypto is still relatively new and developing, and there may be limited options for insuring crypto assets held in a company. Additionally, many standard insurance policies do not provide coverage for cryptocurrency, so you may be required to purchase a specialized insurance policy.

Should I open an LLC, C Corp or S Corp?

LLCs provide a simple and affordable corporate structure which is the right fit for most small businesses. However, an S Corp and C Corp are two popular alternatives to an LLC.

C Corporations: C Corps are separate entities that have their own tax obligations and file their own tax returns. They can choose to retain any profits they earn or distribute them to shareholders as dividends. C Corporations are also the only business structure that can go public by listing their shares on a stock exchange.

S Corporations: S Corps. are a special type of pass-through entity that combines the benefits of a C Corporation and an LLC. Like a C Corporation, they file their own tax returns, but like an LLC, they pass their income through to the owners. However, there are some limitations to S Corporations.

Starting an S Corp or C Corp instead of an LLC may be advantageous or disadvantageous depending on your situation. It’s best to seek advice from a crypto-savvy accountant or lawyer. The most appropriate choice can vary depending on the specific needs and goals of the business and its owners.

The state you choose to incorporate matters

The state in which an LLC is formed can have a significant impact on the tax obligations of the company and its owners, as well as the formation and ongoing costs of the business.

While an LLC can be formed in any state, Wyoming has become a hub for the cryptocurrency industry, thanks to its progressive legislation surrounding digital assets. The state recognizes cryptocurrencies as intangible property and applies all property laws to them. Additionally, Wyoming's laws enable crypto banking and provide enhanced protections for anonymous LLCs where the owner’s name isn’t specified in a state’s public database. 

How to form an LLC

Registration requirements vary according to each state, but the general steps to form an LLC are:

  1. Choose a Name: You typically can’t use words like “University” or “Bank” in your company’s name, but other than that, if your desired name is available after doing a company database search, you should be in the clear.
  2. Appoint a Registered Agent: A registered agent is responsible for receiving legal documents and official correspondence on behalf of the LLC.
  3. File Articles of Organization: Articles of Organization establishes the formation of the LLC and includes information such as name, address, and purpose of the business.
  4. Prepare an Operating Agreement: An operating agreement is a document that outlines the ownership, management, and financial structure of the LLC. It clearly establishes the rights and responsibilities of the owners.
  5. Get an EIN: An EIN, or Employer Identification Number, is a federal tax ID number assigned to the LLC by the IRS. It is used to identify the business for tax purposes.

Once these steps are complete, the LLC is formed and can commence operations. 

How to transfer your existing crypto to your LLC

You can transfer your existing crypto portfolio to your Crypto LLC as a capital contribution. Capital contribution means an asset given to the LLC in exchange for equity.

Capital contributions are tax-free. If you initially invest $10,000 worth of crypto in your LLC as a capital contribution, you would receive $10,000 of equity. You would not be required to pay a capital gains tax on your new equity. This same rule applies to your LLC, which would not pay a tax on the $10,000 of new working capital.

It is important to record the capital contributions in the operating agreement including details such as description of the asset, value of the asset, date of contribution and ownership percentage received. 

Now that you’re up to speed, talk to a tax professional

As a crypto trader or crypto business you may want to consider an LLC or other corporate structure to streamline taxes and protect assets. While they don't always help save on taxes, they can help keep personal and business assets separate, assign ownership to multiple parties, and protect owners' personal assets.

That said, there is a cost to maintaining one. Please consult your tax advisor to decide on the most optimum entity structure and other tax saving methods for your specific situation.

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Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.