Crypto LLCs: How Do They Work, and When Should You Use Them?

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Crypto LLCs: How Do They Work, and When Should You Use Them?

The majority of cryptocurrency traders and investors report their transactions on Form 1040; However, there may be circumstances in which a corporate structure would be advantageous. For instance, a mining pool might implement a corporate structure in order to deduct operating costs and articulate the tax responsibilities of each individual owner unequivocally. Or, the token issuer could use a limited liability company (LLC) to limit the owners’ personal liability. Let’s take a look at the operation of limited liability companies (LLCs), the tax advantages they offer, and some alternative corporate structures. The most common tax form is Form 1040 crypto traders and investors use to report their trades. However, in some cases, a corporation may be better.

What is an LLC?

Business owners can shield themselves from personal liability and enjoy other advantages by forming a limited liability company (LLC). They’re used in a wide variety of industries, from consulting to construction, because of their low cost and ease of use. They have also recently risen in popularity among crypto traders, investors, miners, and businesses.An LLC can be registered in most states for a one-time fee of $40 to $500, plus annual renewal fees. There is typically an annual fee paid to a registered agent for handling the LLC’s legal documents and tax notices. Some of the expenses a limited liability company might incur include those associated with getting legal advice, managing financial transactions, and filing tax returns.Establishing a limited liability company in any state is possible, but Wyoming is leading the way with its progressive cryptocurrency legislation. All laws about property also apply to cryptocurrencies because the state recognizes digital assets as intangible property. The state also allows cryptocurrency banking, and limited liability companies (LLCs) can work anonymously and with more legal protections than in some other states.

Pros and Cons of Crypto LLC

Pros

  • Write-Offs – Schedule C allows sole proprietors to deduct business-related expenses and casualty losses. 
    • While an LLC isn’t required, having one makes it much simpler to keep business and personal finances apart.
  • Liabilities – Members of an LLC do not personally guarantee the obligations of the business.
    • The only exception is if a violation causes the corporate veil to be pierced, like mixing personal and business finances in the same books.
  • Privacy – LLCs can be created in Wyoming and other states without disclosing the identities of their owners. 
    • Once more, the owner’s identity can be accessed in some manner, albeit after overcoming a slightly more substantial obstacle.

Cons

  • Cost – A significant ongoing expense is associated with forming an LLC, and the entity itself does not provide any tax benefits that an individual taxpayer would not receive. 
    • As a result, your net profit may be lower than it would be if you filed your taxes using Form 1040 and Schedule C as an individual.
  • Complexity – Since multi-member LLCs are more difficult to establish, you may need the assistance of legal and financial professionals in the beginning and throughout the life of your business. 
    • So long as a simpler option exists, many people avoid them because they find them too difficult to understand.

How LLC Taxation Works

LLCs are “pass-through” entities, meaning the profits are passed to the owners. Consequently, they do not produce any tax advantages that would not be available to an individual under the law. Instead, they make it easier to keep business and personal finances distinct, distribute earnings among multiple owners and limit legal responsibility.

However, the tax implications of forming an LLC with one member versus several members are not exactly the same.:

  • Single-Member LLCs – Profits or losses from a single-member LLC are reported on the owner’s personal tax return (Form 1040). The Internal Revenue Service does not treat single-member LLCs as distinct entities.
  • Multi-member LLCs – Each member of a multi-member LLC will typically have a stake in the company’s success or failure, as outlined in the company’s operating agreement. 

All shareholders are responsible for paying taxes on their proportionate share of the company’s gains or losses. The LLC must file Form 1065 with the IRS and give each owner a copy of Schedule K-1 that describes their ownership stake.

Thanks to crypto tax software, it’s now easier than ever to fulfill your tax obligations. Using ZenLedger, you won’t have to manually compile your transactions from various exchanges and wallets, calculate your capital gains and losses, and fill out any necessary IRS forms. More than any other company in the market, we support 400+ exchanges, 100+ DeFi protocols, and 10+ NFT platforms. Do it now!

Alternatives to Consider

Although limited liability companies (LLCs) are the easiest and most affordable corporate structure for most small businesses, C corporations and S corporations are also viable options. 

Creating this kind of company comes with a lot of extra costs, but there may be tax benefits or other opportunities in the long run, like selling shares to the public.

  • C Corporations: forms separate tax returns and pays its own money to the government. 

They can keep the money for themselves or pay it out to shareholders in the form of dividends (Form 1099-DIV). 

They are the only legal structure that can go public on a stock exchange and issue shares to new investors.

  • S Corporations: Unique among pass-through entities, S Corporations bring together the best features of both the C Corporation and the Limited Liability Company. 

Although it files its own tax returns independently, like a corporation, this entity may allow its owners to pass through any profits to themselves, like a limited liability company. However, there are restrictions on the number of owners that can receive shares. Confused about what’s best for your cryptocurrency company? An accountant or lawyer who understands the industry can help you sort it out. The best option is often unique to each company, its owners, and its long-term goals. Some structures are permanent, so it’s important must carefully consider your options before deciding. Tax loss harvesting and holding crypto assets for longer periods of time are two strategies that could help you lower your taxable income. If you own a business, consulting a tax advisor can help you reduce taxable income by identifying eligible deductions.

In conclusion

A limited liability company (LLC) or another type of corporation may be a good choice for crypto traders, investors, miners, and businesses looking to minimize their tax liability and safeguard their assets. They don’t always help you save money on taxes, but they do help you keep your business and personal finances distinct, give multiple people a stake in the company, and shield your personal assets. ZenLedger is a tax optimization and planning tool designed specifically for cryptocurrency traders.

 You can start an LLC in American Samoa today, from your phone, tablet, or PC. It is easy! Just go to https://llc.as.gov/ to file your documentation and create your American Samoa LLC today.

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