Forming an LLC for Cryptocurrency: A Strategic Overview

February 20, 2024

Forming an LLC for crypto can be a strategic move for individuals and groups involved in activities like mining or extensive trading. However, there are many common misconceptions about the benefits of an LLC.

At Gordon Law, our mission is to guide cryptocurrency investors through a complex and confusing tax landscape. We help traders and businesses like you achieve maximum tax savings, avoid IRS headaches, and create a foundation for long-lasting success.

In this guide, we’ll walk you through the benefits, drawbacks, and special considerations of forming an LLC for your cryptocurrency activities. Let’s dive in.

Benefits of Forming an LLC for Cryptocurrency

  • Asset Protection: An LLC separates your personal assets from business liabilities, providing a layer of asset protection against financial claims and debts. If there are multiple business partners, an LLC with a strong operating agreement can also protect each partner’s equity.
  • Anonymity: Forming an LLC for crypto can provide additional anonymity for digital asset transactions; funds can be held in an LLC rather than your individual name.
  • Tax Advantages: An LLC allows for potential tax deductions related to business operations, though benefits vary based on individual circumstances. However, keep in mind that you can still operate a business and deduct expenses without registering an LLC.
  • Organization: An LLC provides a formal structure for managing crypto activities, improving organization and efficiency.
  • Professionalism: An LLC may enhance the credibility of your business operations.
Pro Tip: The IRS has specific requirements for what constitutes a business vs a hobby for tax purposes. Hobbyists can’t deduct any expenses, and simply forming an LLC may not be enough to qualify as a business. Reach out to our experienced tax professionals for advice on your specific situation.

Drawbacks of a Cryptocurrency LLC

  • Cost and Maintenance: The initial LLC registration and ongoing maintenance can incur some costs.
  • Limited Direct Tax Benefits: While an LLC can bring tax advantages, expecting dramatic tax savings without proper planning can lead to disappointment.
  • Beneficial Ownership Information (BOI) Reports: As of January 1, 2024, most LLCs are required to report beneficial ownership information to FinCEN. However, these reports are not available to the public.

Who Should Consider Forming an LLC for Crypto?

  • Miners: If you’re participating in a mining pool or investing in your own mining setup, you can use an LLC to manage expenses and protect personal assets. This approach allows for a clearer separation between personal and business finances.
  • Traders: Active traders, particularly those who qualify for trader tax status, can benefit from forming an LLC to organize expenses, enhance tax strategies, and potentially improve their professional credibility. An LLC for traders can create a more structured approach to managing investments and deductions related to trading activities.
Pro Tip: Check out our 12 tips to avoid capital gains tax on crypto. We have tips that can work for all cryptocurrency traders!

Forming an Offshore Business for Cryptocurrency

Forming an offshore LLC (or equivalent structure) can offer specific benefits, including enhanced privacy and potential tax benefits.

However, with the introduction of Global Intangible Low-Taxed Income (GILTI), the tax savings may not be as dramatic as you imagine.

By forming an offshore business, you may also be required to file specific tax disclosure forms, such as Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) or Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches). This increases the cost and complexity of your annual tax returns.

Please reach out to our experienced tax and business attorneys to discuss the potential perks and drawbacks of forming an entity offshore.

Choosing the Right State for Your LLC

States like Delaware and Wyoming are popular for forming LLCs due to their crypto-friendly laws, privacy protections, and business environments. Choosing the right state depends on your specific needs, including the nature of your crypto activities and long-term business goals.

Pro Tip: Regardless of where you register your cryptocurrency business, your income will be taxed, at a minimum, by your state of residency.  If you want to maximize your crypto tax savings, our team can help design a strategy tailored to your needs. Contact us to design your personal tax-saving strategy.

Making an Informed Decision

Forming an LLC for cryptocurrency is not a one-size-fits-all solution. It requires careful consideration of your specific situation, objectives, and the legal landscape.

Consulting with professionals who understand the legal, tax, and cryptocurrency landscapes is essential to make an informed decision that aligns with your strategy and complies with regulatory requirements.

Ready to explore the potential of an LLC for your cryptocurrency activities? Our team is here to help you achieve maximum tax savings and answer any questions you may have. Give us a call today.

Speak with Our Crypto Tax Pros

Use the form below or call (847) 580-1279