If you’ve been involved in crypto activities, whether it be mining, investing, or trading for a while, it could be that starting an LLC for crypto investing crossed your mind at least once. Or, it could be that you still haven’t dipped your toes in this highly profitable market but are actively thinking about certain benefits setting up a business entity could provide. Should you go for it? Here are the answers!
LLC for Crypto Investing – The Good and the Bad
A limited liability company is a business structure mainly preferred by small business owners or single business owners. LLC seems like a way better solution than the sole proprietorship or corporation simply because it provides limited liability protection and a favorable taxation structure while still being simpler and more affordable to set up. Yet, are there any potential disadvantages to starting an LLC? You bet! But let’s talk about the pros first and leave the cons for a little bit later.
Significant tax savings and tax deductions
Starting an LLC, especially an offshore LLC, provides you with access to significant tax savings and tax deductions. Deductions and tax rebates are not available for crypto traders as individuals while LLCs can reap many tax benefits, including being given the ability to write off casualty losses.
Casualty losses such as exchange hacks or wallet hacks as well as unplanned liquidations are quite common in the poorly regulated crypto space. As an LLC, you’ll be able to write off these losses for tax purposes and claim attractive tax deductions.
You can write off other business operating expenses as well. If you are mining Bitcoin, you can write off the cost of electricity through Schedule C.
Using capital losses to reduce capital gains
Since crypto markets are highly volatile, you can easily make great profits in one year and then experience even greater losses the next year. By starting an LLC, you can use these losses to offset capital gains in more profitable years (which covers both past and future capital gains).
A greater level of security and privacy
Limited liability is a self-explanatory concept. By starting an LLC, your personal assets will be safe and separate from your business finances, which means that they can’t be seized in order to repay the debt if your LLC goes bankrupt. As long as you are keeping separate books and records, you are good to go. On the other hand, facing any financial issues apart from your LLC, you can rest assured that your crypto assets would remain safe.
Besides giving you more security, LLC also makes it possible to preserve privacy. Provided they are structured in the right way, offshore LLCs provide the greatest level of privacy since no activities or digital assets are ever linked to the owner’s name. You can also set up an LLC through an agent. So, if you are among those who believe that crypto should be all about confidentiality, decentralized finance, and privacy, LLC is the way to go.
Incorporating can be time-consuming and costly
To create a new entity, you’ll either have to hire an attorney or find a technology platform that provides legal services. Starting an LLC is a complex task while calculating taxes and tax returns is even more complex, and it is virtually impossible that you would be able to handle all this on your own. You’ll have to pay annual franchise fees varying from a few hundred to a thousand dollars, too (which depends on the state where you want to file your LLC in).
LLCs are difficult to dissolve
Dissolving an LLC is a nightmare! As much as incorporating it is time-consuming and complex, dissolving it involves even greater commitment. Again, you’ll have to hire an attorney, and, needless to say, pay a costly price for their services. This is also why you should think twice before starting an LLC for crypto investing. Incorporating it costs money, dissolving it costs money, and, in the meantime, your trades should be quite profitable if you want to be in the black.
So, Should You Take a Chance On an LLC?
Obviously, setting up an LLC comes with both advantages and disadvantages. Yet, you should take additional factors into account before actually going for it.
Setting up a separate legal entity makes sense only if your trades are profitable and your portfolio is gaining value. Basically, if your trading activity is in the red most of the time, there’s no point in setting up an LLC.
You should also be able to realistically predict your profits. Although the crypto market can be immensely lucrative, it is very unpredictable as well so you can experience major losses during turbulent times. Are you mentally and financially prepared for any kind of outcome?
Last but not least, bear in mind that you should be maintaining your LLC and covering insurance and other costs as long as it is active.
LLC for crypto trading can help you make sure that your own personal capacity is not put in danger in case your investments go down while it also comes with financial and tax benefits. However, this is not an option for every crypto investor/trader, and it is especially not necessarily the wisest move to make if you are a beginner. Yet, if you still want to give it a try, consult a professional about deciding on the LLC structure as well as where you want to form it first.
Ernest Miller is a research analyst for Investment Talk. He has built his career as a banking officer and later on a financial advisor. Now, he is focusing primarily on blockchain and cryptocurrency, but here you will also find his texts on the traditional economy, as well as analyses of stocks and investments.