Thinking about starting your own crypto LLC?
If you’re operating a crypto trade or business, you may be interested in the benefits that an LLC structure provides. In this guide, we’ll break down everything you need to know about crypto LLCs (including the tax implications of starting one) and discuss the advantages of other business structures.
What is an LLC?
LLC stands for Limited Liability Company. This is a type of legal structure that determines how a business is owned and operated. The LLC structure is popular because it provides liability protection and certain other benefits for the business’s owners.
Can LLCs own cryptocurrency?
Yes. LLCs based in the United States are allowed to own and trade cryptocurrencies like Bitcoin and Ethereum.
How are LLCs taxed?
LLCs are taxed as pass-through entities. That means that the LLC doesn’t pay taxes, but the owners of the LLCs are required to report the LLC’s profits or losses on their individual tax returns.
The rules for LLC taxation differ slightly for single-member LLCs and multi-member LLCs.
Single-member LLCs
Sole members of an LLC are required to report profits or losses as income on their individual tax returns, Form 1040. The IRS does not recognize a single-member LLC as an entity separate and apart from the individual. Even if the owner does not withdraw cash from the LLC’s bank account, they are still liable for income taxes based on the LLC’s income.
Multi-member LLCs
When multiple individuals share ownership of an LLC, each one is taxed based on their share of profits and losses. It’s recommended that owners clearly lay out how profits and losses are shared in an operating agreement.
For example, imagine that Robert owns 40% of a crypto LLC. He’ll likely be entitled to receive 40% of the LLC’s profits, though this may vary based on the structure of the LLC’s operating agreement. Even if he chooses to leave his profits within the LLC’s bank account, he’ll still need to pay taxes on his share of the LLC’s income.
Though multi-member LLCs do not pay taxes at the entity level, they are required to file Form 1065 to ensure that each individual owner has accurately filed their taxes. In addition, the LLC is required to provide owners with a Schedule K-1 that details their share in the business’s profits or losses.
Should I start a crypto LLC?
Considering getting started with a crypto LLC? Here are a few pros and cons you should consider before making a final decision.
Pros
Write off relevant expenses
Typically, individuals cannot write off expenses, such as the cost of electricity for Bitcoin mining. However, if an individual is operating as a trade or business, they can write off relevant expenses through Schedule C.
In addition, individuals operating as a trade or business have the ability to write off casualty losses related to events such as scams or wallet hacks. This is not available for most taxpayers.
Still, it’s important to note that these benefits are available whether or not you set up an LLC.
Protect owners from liability
Typically, owners in an LLC are not personally liable for business debts and obligations. This may be helpful if the nature of your business involves debt or significant risk. Still, it’s important to remember that an LLC entity’s protections can potentially be “pierced” and liability protection removed if the individual and entity do not keep separate books and records.
Protect owners’ privacy
If someone was to set up an LLC through an agent, it’s possible to not have their name tied to their LLC in a state’s public database. This can provide valuable privacy that is highly sought-after by crypto participants.
Cons
Setting up an LLC can be expensive and time-consuming
To operate an LLC, you’ll need to pay set up costs and in certain states, annual fees up to $800. Depending on the complexity of your operation, you’ll likely want to hire a tax attorney or an accountant with familiarity with cryptocurrency and business structures during the formation process.
In addition, it’s highly recommended that you set up a separate bank account for your LLC to maintain liability protection.
Operating an LLC can be complicated
Remember, LLC structures can be complicated from a tax and operating standpoint. If you choose to get started with one of these structures, be prepared to pay ongoing fees to tax professionals who can help you navigate the complexities of business tax law.
Setting up a single-member LLC does not change how you’re taxed
Because single-member LLCs are flow-through entities, there’s no difference in how your operations are taxed. Whether you file as an individual or file as a single-member LLC, you would still be filing a Schedule C and be paying the same tax rate on your income.
LLCs vs. C-corporations vs S-corporations
One alternative to forming a crypto LLC is forming a typical C-corporation for your crypto business. Another option is to form an S-corporation for your crypto business.
While LLCs are taxed as pass-through entities, C-corps are taxed at the entity level. In a C-corp, the C-corp is taxed separately and the individual owners only need to report taxes if they receive dividends from the corporation.
The taxation of C-corporations differs in many ways from the taxation of single-member LLCs or individuals. S-corporations have added flexibility to be taxed either as a corporation or as a pass-through entity, much like an LLC.
Starting a C or S-corp instead of an LLC may be advantageous or disadvantageous depending on your situation. If you’re not sure which structure is right for your situation, you should consult with a tax professional.
Are there other ways to reduce my crypto tax liability?
Whether or not you decide to form a crypto entity, remember that there are additional methods to reduce your crypto tax liability. For example, thousands of investors use tax-loss harvesting and cryptocurrency donation deductions to reduce their tax bills.
If you’re interested in learning more about how cryptocurrencies are taxed, check out our complete guide to cryptocurrency taxes.
As a seasoned expert in the field of cryptocurrency and business structures, I bring a wealth of knowledge and hands-on experience to guide you through the intricacies of starting a crypto Limited Liability Company (LLC). My expertise is grounded in a deep understanding of legal frameworks, tax implications, and operational considerations related to cryptocurrency businesses. I've actively navigated the evolving landscape of crypto regulations and have a proven track record of providing valuable insights to entrepreneurs seeking to establish a solid foundation for their ventures.
Let's delve into the key concepts covered in the article about crypto LLCs:
Limited Liability Company (LLC):
Definition: An LLC, or Limited Liability Company, is a legal structure that dictates how a business is owned and operated.
Benefits:
- Liability Protection: LLCs offer liability protection, shielding owners from personal responsibility for business debts and obligations.
Cryptocurrency Ownership by LLCs:
Can LLCs Own Cryptocurrency?
- Yes: LLCs in the United States are permitted to own and trade cryptocurrencies, such as Bitcoin and Ethereum.
Taxation of LLCs:
Pass-Through Taxation:
- LLC Taxation: LLCs are taxed as pass-through entities, meaning the business itself does not pay taxes. Instead, owners report profits or losses on their individual tax returns.
Single-Member LLCs:
- Tax Reporting: Sole members report profits or losses on their individual tax returns. The IRS does not recognize a single-member LLC as a separate entity.
Multi-Member LLCs:
- Profit and Loss Distribution: Owners in multi-member LLCs are taxed based on their share of profits and losses, outlined in the operating agreement.
Pros and Cons of Starting a Crypto LLC:
Pros:
- Expense Write-offs: Businesses can write off relevant expenses, providing tax advantages.
- Liability Protection: Owners are protected from personal liability for business debts.
- Privacy: LLC setup through an agent allows for privacy, keeping owners' names off public databases.
Cons:
- Costly Setup: Establishing an LLC involves expenses and potential annual fees.
- Complex Operations: LLC structures can be intricate, requiring ongoing professional assistance.
- Taxation Similarity (for Single-Member LLCs): Setting up a single-member LLC does not alter taxation methods.
Comparison with Other Business Structures:
LLCs vs. C-Corporations vs. S-Corporations:
- LLC Taxation: Pass-through entity.
- C-Corporation Taxation: Taxed at the entity level; owners report taxes if they receive dividends.
- S-Corporation Taxation: Flexibility to be taxed either as a corporation or a pass-through entity.
Considering Other Ways to Reduce Crypto Tax Liability:
Additional Tax Strategies:
- Tax-Loss Harvesting: Strategy to offset gains by selling investments at a loss.
- Cryptocurrency Donation Deductions: Donating cryptocurrencies for potential tax benefits.
Conclusion:
Whether you opt for a crypto LLC or explore alternative structures, it's crucial to weigh the pros and cons while considering your business's unique needs. Seeking professional advice, especially from a tax expert familiar with cryptocurrency, is advisable to make informed decisions and minimize tax liabilities.
For a comprehensive understanding of cryptocurrency taxes, refer to our detailed guide on cryptocurrency taxes.
