Developing an LLC for Your Cryptocurrency

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There is no question that the global cryptocurrency market has become extremely popular in recent years. In fact, this market was valued at $1.49 billion in 2020, and is projected to reach $4.94 billion by 2030, according to Allied Market Research.

Cryptocurrencies are digital or virtual currencies that use an alternative form of payment via encryption algorithms. These currencies function both as a currency and as a virtual accounting system.

Specifically, this virtual currency uses blockchain technology to authenticate transactions, which is a decentralized technology spread across many computers that manages and records transactions. Instead of relying on banks to verify transactions, it uses a peer-to-peer system that enables users to send and receive payments from anywhere across the globe.

There are several advantages of cryptocurrencies, including cheaper and faster money transfers and decentralized systems, which do not collapse at a single point of failure. At the same time, there are also some disadvantages of cryptocurrencies, which include their price volatility, high-energy consumption for mining activities, and use in criminal activities.

Whether you are an experienced crypto trader or a newbie, it is very important to understand the ins and outs of cryptocurrency. Additionally, if you are operating a crypto trade or business, you may be interested in the benefits that an LLC structure provides. For more information, read on!

What is an LLC?

An LLC is a limited liability company. LLCs limit the liability of owners/shareholders from the debts of the business and against lawsuits against the business. The LLC structure is popular because it provides liability protection and certain other benefits for the business’ owners. LLCs that are based in the United States are permitted to own and trade cryptocurrencies, such as Bitcoin and Ethereum.

Why create an LLC?

The main reason to form an LLC is to limit personal liability because LLCs have their own existence. Think of them as artificial persons. The LLC owns the business, not the people forming it. LLCs enter into their own contracts and deals, can sue and be sued, and are liable for their own debts and obligations.

Who owns the LLC?

Individuals called “members” own an LLC. These owners have an equity interest in the assets of the business, shown in the business balance sheet as owners’ equity.

How are the profits and losses of an LLC managed?

LLC profits and losses are passed through to individuals.

How are LLCs taxed?

LLCs are taxed as pass-through entities. This means that the LLC doesn’t pay taxes, but the owners of the LLCs are required to report the LLC’s profits or losses on their individual tax returns. The rules for LLC taxation differ slightly for single-member LLCs and multi-member LLCs.

Single-member LLCs: Sole members of an LLC are required to report profits or losses as income on their individual tax returns, Form 1040.

Multi-member LLCs: When multiple individuals share ownership of an LLC, each one is taxed based on their share of profits and losses. It’s recommended that owners clearly lay out how profits and losses are shared in an operating agreement.

What are the advantages of creating a crypto LLC?

There are several advantages to developing a crypto LLC. These include writing off expenses, liability protection, and privacy protection:

Writing off expenses: Most of the time, individuals are unable to write off expenses, such as electricity for Bitcoin mining. But if you are operating as a trade or business, you are able to write off relevant expenses through Schedule C. Additionally, individuals operating as a trade or business have the ability to write off casualty losses due to scams and hacks.

Liability protection: Most LLC owners are not personally liable for business debts and obligations. But keep in mind that an LLC entity’s protections can be terminated if the individual and entity don’t keep separate books and records.

Privacy protection: LLC owners do not need to have their name tied to their LLC. This can provide much needed privacy protection for individuals involved in crypto.

What are the disadvantages of developing a crypto LLC?

In addition to the advantages, there are also several disadvantages to starting a crypto LLC. These include the following:

High cost and time: Operating an LLC equates to paying set-up costs and sometimes, annual fees up to $800. Depending on the complexity of your LLC, you may want to hire a tax attorney or an accountant with cryptocurrency knowledge. It’s also preferable to set up a separate bank account for your LLC, so you can maintain liability protection.

The process can be complicated: For tax and operating purposes, LLC structures can be complicated. As a result, be prepared to pay ongoing fees to tax professionals, who can help you navigate the complexities of business tax law.

Creating a single-member LLC does not affect tax rules: Single-member LLCs are flow-through entities. Consequently, there is no difference in how your operations are taxed. Whether you file as an individual or file as a single-member LLC, you must file a Schedule C and pay the same tax rate on your income. One alternative to forming a crypto LLC is forming a typical C-corporation for your crypto business. Another option is to form an S-corporation for your crypto business.

Still undecided? Let our Nevada business formation experts help you decide if a Nevada LLC is the right entity for you by calling 1-800-508-1729.


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