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On January 26, The Wall Street Journal reported that MicroStrategy Inc. might face a huge tax liability due to its unrealized gains. The company holds 461,000 bitcoins and could be forced to sell some of them to pay the taxes if no exemption is granted. The issue stems from the Corporate Alternative Minimum Tax (CAMT) in Biden’s 2022 Inflation Reduction Act. This tax requires companies with annual revenues over $1 billion to pay a minimum 15% tax, especially targeting unrealized gains. It could have a significant impact on MicroStrategy’s financial situation and potentially trigger a ripple effect in the cryptocurrency market.
While some argue that such predictions are overly pessimistic, critics point out that taxing unrealized gains could undermine property rights and market stability. It forces companies to sell assets to meet their tax obligations, which might infringe on their right to manage assets freely. Whether Trump will intervene remains uncertain.
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FinTax Commentary：
The Corporate Alternative Minimum Tax (CAMT) is a key tax policy introduced in the United States through the Inflation Reduction Act of 2022 (IRA). It was enacted in response to the practice of some large corporations that, through tax planning and accounting maneuvers, reported substantial revenues while avoiding significant tax payments. Many of these profitable companies paid far less in taxes than the standard corporate rate. To address this issue, CAMT requires companies with annual revenues exceeding $1 billion to pay a minimum tax rate of at least 15% based on their adjusted financial statement income, rather than solely on their taxable income. For foreign companies, if their U.S. income exceeds $100 million and the foreign parent company’s annual revenue meets the $1 billion threshold, they are also subject to CAMT. By taxing income directly from financial statements, CAMT prevents companies from reducing their taxable income to avoid taxes, ensuring that these large enterprises pay reasonable taxes based on their actual financial conditions. It is worth noting that before the introduction of CAMT in the U.S., countries like Denmark and France had already begun taxing unrealized gains on crypto assets to close tax loopholes.
CAMT is designed to boost government tax revenues and promote social equity through tax redistribution. However, its implementation may also lead to double taxation, especially for crypto companies. Crypto assets may be taxed on unrealized gains while held and again on realized capital gains when sold. This can impose a heavy tax burden on crypto companies, potentially leading to severe cash flow crises. Additionally, CAMT is seen as infringing on companies’ rights to freely manage and dispose of their assets or resources.
For MicroStrategy, the CAMT issue primarily stems from its large holdings of bitcoins with unrealized gains. Recently, the market value of bitcoins has surged, significantly increasing the company’s asset value. Under U.S. tax law, unrealized gains are generally not taxed; that is, the appreciation of assets held by investors is not considered taxable income unless the assets are sold. Therefore, despite the substantial increase in the value of MicroStrategy’s bitcoins, the company has not included these gains in its financial statement sales revenue or paid taxes on them, as the bitcoins have not been sold. However, CAMT changes this situation. According to CAMT, unrealized gains recorded in the financial statements of companies with annual revenues meeting the relevant standards will be included in taxable income. This means that even though MicroStrategy’s large bitcoin holdings have not been cashed out, the unrealized gains may still be considered as adjusted financial statement income, resulting in a significant CAMT liability. This tax burden will place immense pressure on MicroStrategy’s financial condition and may also impact its future strategic decisions.
Currently, to avoid this tax liability as much as possible, MicroStrategy has filed exemption requests with the Internal Revenue Service (IRS), attempting to avoid the relevant tax obligations through regulatory interpretations or policy adjustments. Although the IRS has previously granted exemptions to companies like Berkshire Hathaway, there is no precedent for such exemptions in the crypto industry. Meanwhile, Trump has consistently shown a relatively lenient attitude toward the crypto industry, preferring to avoid overly strict regulation and taxation of crypto assets. However, whether the IRS will ultimately grant an exemption to MicroStrategy based on political considerations or industry support remains uncertain.
From MicroStrategy’s tax predicament, it is evident that CAMT poses new compliance challenges for large companies, especially multinational corporations, investing in crypto assets. On one hand, since CAMT is based on adjusted financial statement income, companies must carefully review unrealized gains in their financial reports. For companies that already hold or plan to hold crypto assets, it is essential to promptly assess the tax implications of these assets to address potential future tax liabilities. On the other hand, for foreign companies operating and investing in crypto assets in the U.S., the impact of CAMT is even more complex. According to CAMT requirements, foreign companies must not only calculate their U.S. income but also consider the financial data of the foreign parent company. Therefore, foreign companies in the U.S. must carefully assess unrealized gains in their own and their parent company’s financial reports when formulating crypto asset investment strategies and should ideally optimize their existing strategies to reduce future tax burdens. FinTax will continue to closely monitor the developments in this case and will be the first to reveal whether MicroStrategy’s troubles are resolved.