Taxes Are a Wild Card for Public Companies Holding Crypto

Investors in MicroStrategy, Tesla, Block and Coinbase need to consider how wild price swings will affect results, not only directly but indirectly due to complex tax accounting rules. This piece is part of CoinDesk's Tax Week

AccessTimeIconFeb 22, 2022 at 2:58 p.m. UTC
Updated Jun 14, 2024 at 4:55 p.m. UTC

Some very big, and very vocal, publicly traded companies are investing and transacting in digital assets, but the longer-term tax impact of that strategy remains to be seen.

PwC’s 2020 “Global Crypto Tax Report” highlighted that it took five years after bitcoin launched in 2009 before tax authorities issued any substantive guidance. Multinationals face significant tax uncertainty when investing in digital assets, transacting with crypto, facilitating crypto purchases and sales and using crypto to pay interest.

Francine McKenna is an adjunct professor at American University's Kogod School of Business, a former auditor and writer of The Dig, a newsletter about accounting and corporate governance.

Regulatory uncertainty in the U.S. about whether digital assets are securities and thus must be registered with the Securities and Exchange Commission (SEC) also makes it difficult for multinationals to synchronize tax strategies with business models, and financial reporting.

U.S. tax guidance regarding crypto assets is limited. Available U.S. rulings treat virtual currencies as property, not as currency that generates a foreign currency gain or loss for tax purposes, even if it is a “convertible virtual currency” like bitcoin. Some non-U.S. tax regulators have issued guidance involving direct and indirect tax, too.

This article is part of CoinDesk’s Tax Week series.

The accounting standards for business transactions that use digital assets are not clear, either. The U.S. Financial Accounting Standards Board only recently agreed to address the topic of crypto assets, but the effort could take years. Current non-binding guidance – whether under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Accounting Standards (IFRS) – suggests crypto investments should be accounted for as intangible assets, such as copyrights or trademarks. In the event of a price decline, the original cost is adjusted, also known as an impairment, but upward adjustments don’t happen until an asset is sold.

It's important to view digital asset investing and transactions through a tax lens because the analysis is different from that used for financial reporting. Investors will be challenged to anticipate or understand the full impact of these crypto activities.

MicroStrategy and Tesla have made investing in bitcoin a key part of their strategies. When the price of digital assets such as bitcoin is volatile, accounting guidance for recording and valuing crypto-assets can take a bite out of earnings and make it hard to determine the value assigned to crypto-assets for financial reporting. Positive swings are not reflected in their carrying value until the crypto-assets are sold.

When crypto is spent or accepted like cash, it gets more complicated. For example, the crypto’s value may change significantly before the transaction is settled. Bitcoin may be sold to make a payment in fiat or accepted as payment for something priced in fiat. Companies must record a gain or loss by comparing the fair market value of goods or services received to the crypto’s original cost. The fair market value is determined by identifying the equivalent U.S. dollar or other convertible currency value for the crypto based on the rate on an established exchange. In the U.S. and U.K., gains are taxed at top tax rates that are now the same as top corporate income tax rates. That may not be true everywhere. Capital gains tax rates will increase from 19% to 25% in the U.K. in 2023.


MicroStrategy started accumulating bitcoin in September 2020, riding a bucking bronco of bitcoin prices. The company has 124,391 bitcoins and is also an adamant "HODLer." However, its aggressive strategy has created cumulative digital asset impairment losses of $901.3 million that have weighed on overall results in every quarter since then.

It’s not over yet. In its annual report with the SEC filed on Feb. 16, MicroStrategy says at least $163.3 million more in bitcoin losses are coming in the first quarter.

MicroStrategy’s 10-K filing says the company “may not be able to regain or increase profitability on a quarterly or annual basis in the future.” Deferred income tax assets reflect temporary differences between the carrying value of assets for financial reporting and the values used to calculate taxes. MicroStrategy’s bitcoin losses caused deferred tax assets attributable to digital asset losses to increase from $19.8 million in 2020 to $258 million at year-end 2021.

MicroStrategy can’t use the deferred tax assets to reduce its tax liability now because it doesn’t have any federal tax due. At year-end 2021, the valuation allowance (a kind of loss reserve that offsets the deferred tax asset) was $1 million, less than a year earlier. If the market value of bitcoin declines or MicroStrategy is unable to return to profitability, the company says in its annual report, it may be required to increase the valuation allowance against its deferred tax assets, resulting in a charge that would “materially adversely affect net income,” which is already in the red.

Andrew Schmidt is an associate professor of accounting at North Carolina State University, whose recent research focuses on corporate use of deferred tax assets. He told me that even if MicroStrategy discloses that its bitcoin strategy may continue to generate near-term losses, that does not mean the company should record an allowance against its deferred tax asset at this point in time.

“The fair market value of MicroStrategy’s bitcoin holdings as of the [Dec. 31, 2021] balance sheet date is approximately $5.7 billion,” Schmidt said “The sale of this bitcoin would likely generate enough capital gain to offset the capital loss created by the $0.8 billion bitcoin impairment in 2021. If prices remain high, the company can sell bitcoin at any time to generate enough taxable income to use its existing deferred tax assets. That may be why MicroStrategy is not taking a hit for a bigger valuation allowance just yet.”

MicroStrategy purchased bitcoin using proceeds from three debt issues, the sale of Class A common stock, and the proceeds from liquidations of short-term investments. MicroStrategy even collateralized its secured notes, due to mature in 2028, with 13,449 of MicroStrategy’s bitcoins acquired on or after June 14, 2021.

If bitcoin goes lower or starts to crash, not only does an increase in the valuation allowance become inevitable, but the value of the bitcoin set aside as collateral for the secured notes will also decline. MicroStrategy would then need to pledge additional bitcoin as collateral to secure that debt. A sustained price decline could also cause MicroStrategy to sell its bitcoin at a loss, which would create even more potentially unusable deferred tax assets.


Tesla bought $1.5 billion in bitcoin at the beginning of 2021 and then sold some in the same first quarter. Tesla accepted bitcoin as payment for its electric vehicles outside the U.S. for a short time. The crypto payments it received were thrown in its bitcoin investment pot as intangible assets, not cash, subjecting it to the same accounting treatment that only recognizes value declines. Tesla recorded impairment losses of $101 million in reducing the value of its bitcoin and a gain of $128 million when it sold some. The net taxable income impact was a negligible – for Tesla – $27 million.

Tesla has been pessimistic about its ability to ever utilize its enormous deferred tax asset balance because of its history of net losses. It has an 80% valuation allowance against its deferred tax asset because it doubts it will ever use it. Operating results have improved lately but that has very little to do, so far, with bitcoin investments.


Block Inc., formerly known as Square, made modest bitcoin investments totaling $220 million during 2020 and 2021. Since then it has recorded impairment losses of $77 million, leaving a carrying value of $148 million. That’s not a big bitcoin investment commitment compared with MicroStrategy. However, fee revenue for facilitating crypto purchases and sales represents 59% of Block’s gross revenue as of Sept. 30, 2021. Gross margins on the crypto transactions were only 2%, and represent only 5% of total gross margin, but revenue from this business now dwarfs its traditional transaction fees.

The company began lending out its bitcoin in 2021, but as of Sept. 30, 2021, total bitcoin loaned is only $6.0 million. The bitcoin must be returned so it stays on Block’s books. Only the loan “interest” is taxable.


When Coinbase went public through a direct listing in 2021, the SEC asked it how its proof-of-stake service (for example, for customers who hold assets on the Ethereum 2.0 and Tezos blockchains) complied with securities laws and how Coinbase recognized staking revenue. Coinbase takes a 25% commission on earned rewards it distributes.

JPMorgan was right when its analysts predicted, as reported in Forbes, that Coinbase’s staking revenue would grow to $200 million in 2022. Revenue from “blockchain rewards,” primarily staking revenue, was already $131.1 million through Sept. 30, 2021, compared to $7.72 million for all of 2020. Coinbase says its treatment of crypto asset transactions is consistent with Internal Revenue Service guidance and tax principles, but the landscape is changing every day and getting more complex, so the IRS may disagree.

None of the four companies discussed in this article responded to requests for comment.

Uncharted waters

Asset-backed tokens like non-fungible tokens (NFTs) may digitally represent an asset like art or may represent only limited rights. Tax and reporting will be complex if, for example, the seller, buyer and asset are in three different jurisdictions.

However, David Larsen, an alternative asset specialist at risk consulting and corporate investigations firm Kroll, told me the NFT trend isn’t material enough yet to appear on public company balance sheets.

There is not enough tax guidance to address every scenario presented by an increasing volume of transactions in a complex digital world, Deloitte wrote in a recent “Tax Lens” report on digital assets. Companies and active investors should seek professional advice when trying to match their situation to the Internal Revenue Code, Treasury regulations and case law.

Further Reading from CoinDesk's Tax Week

To offset the impact of rising inflation, the IRS has revised a number of tax provisions to let people keep more of their money in their wallets for the 2022 tax year.

Tax guidance lags innovation. So does tax software. Meanwhile, misconceptions abound. If not careful, investors can end up owing more tax than expected and having to unload crypto to pay the bill

Crypto won’t save you from taxes, but it may eventually make them easier to pay, says futurist Dan Jeffries.

Kevin Ross/Coindesk


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Francine McKenna

Francine McKenna is a lecturer in financial accounting at The Wharton School at the University of Pennsylvania, a former auditor and writer of The Dig, a newsletter about accounting and corporate governance.