Should I Form a Business to Trade Cryptocurrency?
Many of you might be asking yourself this question. Well, if you plan on trading a lot you might want to consider using a separate corporate entity because the legal entity usually receives less scrutiny by the IRS and you receive a lot of tax remedies. Everything you do in/for the business can be categorized as business expense deductions. For example, software, internet access, computers, bank charges, education, margin fees, etc…. You can write off up to $19k for equipment used in trading activities.
Your loss deduction is not limited to your passive gain. For instance, if you had $50,000 in ordinary income from other sources and $2,000 in passive gain and $10,000 in passive loss from trading. You can first offset the loss against the $2,000 in gain and the rest is restricted to only $3,000 of the $50,000 in ordinary income. You can carry the remaining $5,000 forward but same rules apply. However, as a business you can first use the $2,000 in gain and deduct the other $8,000 from the ordinary income. You can hire your kids and family to work in the business. Furthermore, the business structure provides excellent asset protection.
In another example, I have a client who incorporated her business 2 years ago and bought 12 Bitcoins for less than $5,000. She is now sitting on some nice gains. She has been an active trader with a very diversified portfolio in real estate and other securities for about 7 years. She She does not want to sell her Bitcoins yet, but when she does, she can actually use the money to invest in her other line of businesses and take depreciation on the new acquired assets to lower her tax liability and grow her wealth.
The lesson here is, if you already have a business or planning on opening one, you can incorporate the entity and add a dba under there for trading purposes. You need to keep in mind there will be extra costs associated with incorporating and running a business. You might even have to pay self-employment taxes on your income if you do not choose the right entity. An LCC can be treated as a sole prop, partnership, S-Corp, or C-Corp. They all have their advantages and disadvantages. The new tax law is very favorable to small business owners with a 20% deduction of qualified business income under section 199A.
In summary, I would say you definitely need to create a legal corporate entity if you are planning on mining cryptocurrency or trading a lot because the costs can be considerable. But then again, if you are a true passive trader the benefits of incorporating yourself can be very minimal. You should definitely sit down with your CPA to analyze your specific situation to see what would work best for you.