Setup an LLC for Crypto Trading: What You Need to Know
The global cryptocurrency market has experienced a massive boom in recent years. This is not only reflected in the astronomical price increases of many cryptocurrencies and digital assets, but also in the exponential growth in popularity and users of cryptocurrency and decentralised finance.
Whether you are a seasoned crypto veteran who has been trading for years, or you are just now considering getting involved in this exciting industry, it is worth exploring the potential benefits of setting up an LLC for your crypto activities.
In this article, we examine the relative pros and cons of using an LLC for your crypto trading and investing activities, and mention a few additional points that you should consider before getting started.
Table of Contents:
- What Is An LLC?
- Should You Setup An LLC For Crypto Trading?
- Benefits Of Using An LLC For Crypto Trading
- Greater Overall Tax Efficiency
- You May Be Able To Write Off Casualty Losses For Tax Purposes
- Losses Can Be Used To Offset Past And/Or Future Capital Gains
- Greater Security
- Greater Privacy
- Drawbacks Of Using An LLC For Crypto Trading
- What Else You Should Consider
What Is an LLC?
In brief, a Limited Liability Company (LLC) is a type of legal corporate entity that provides similar levels of limited liability protection as a corporation with the ease and simplicity, as well as the same pass-through taxation structure, as a sole proprietorship.
LLCs have become extremely popular choices of business structure throughout the world, as they provide an ideal balance between the attractive features of both corporations and sole proprietorships / partnerships.
They are usually preferred over corporations by smaller businesses and single owners, as they are more affordable and simpler to setup and maintain, and often have greater tax advantages, privacy, and asset protection.
They are better than sole proprietorships because they provide limited liability protection and privacy layers. LLCs are the go-to choice for offshore company incorporation.
Should You Setup an LLC for Crypto Trading?
An LLC provides its owners with various attractive benefits in the areas of tax savings, asset protection, and privacy.
It is no different when it comes to using an LLC for Crypto Trading. Furthermore, those who begin trading crypto as a hobby and find themselves becoming increasingly involved and profitable in the market are certainly advised to explore the option of establishing an LLC through which to continue their endeavours, as it can be far more tax efficient and secure than simply trading in one’s own personal name.
Below, we have outlined the main benefits and drawbacks of using an LLC for Crypto Trading:
Benefits of Using an LLC for Crypto Trading
Greater overall tax efficiency
An LLC can provide greater tax efficiency and savings compared to trading crypto as an individual. This is especially true for an offshore LLC that is incorporated in a tax haven or other favourable international financial centre.
Although LLCs are primarily pass-through entities for tax purposes, they do provide access to special tax rebates, deductions, greater ability to offset losses and business expenses, and so on. Therefore, conducting your crypto trading in the name of an LLC, and more so an offshore LLC, can lead to significant tax savings over time.
You may be able to write off casualty losses for tax purposes
The term “casualty loss” in taxes refers to a type of tax loss that arises out of a sudden, unusual, or unexpected event. An ordinary example would be property damage resulting from a fire or storm as opposed to normal ongoing deterioration of the property.
Cryptocurrency is a very new, unchartered, and poorly understood market, which makes it particularly susceptible to large casualty losses. One of the most common examples is that of exchange hacks leading to large, unexpected loss of funds. Other examples are unplanned liquidations due to the severe volatility of the market, as well as scams and other malicious activities leading to unplanned losses.
In most cases, individuals are not allowed to simply write off casualty losses for tax purposes whereas an LLC is able to. This can lead to significant tax deductions when using an LLC for crypto trading.
Losses can be used to offset past and/or future capital gains
Corporations and LLCs enjoy the privilege of being able to carry back capital losses to offset capital gains in previous years, or else carry forward said losses to offset future capital gains.
For example, this means that an LLC could effectively use its losses from a given year where losses exceeded gains to offset its capital gains in another (more profitable) year. This is a major tax advantage compared to individuals and can lead to much greater tax efficiency over time.
This is especially significant to crypto trading, where extreme volatility can easily result in large profits in some years and large losses in other years. These losses can be transferred to a different time period where it is more tax efficient to do so.
An LLC provides an added layer of security through its limited liability protection to owners. This means that your personal assets will not be at risk should the LLC face bankruptcy or litigations, and vice versa.
This is important when it comes to cryptocurrency, as security is one of the major issues and considerations of crypto trading.
An LLC, and especially an offshore LLC in a foreign jurisdiction, provides a layer of privacy to its beneficial owners. Using an LLC for your crypto trading means that the assets and activities will not be in your personal name, and may be difficult to even connect to you if you structured your LLC in the right way.
One of the core values of cryptocurrency and decentralised finance is privacy and confidentiality, and so it makes sense that many crypto traders would opt for the privacy preserving features of using an LLC over trading in their own personal name.
Drawbacks of Using an LLC for Crypto Trading
- Setting up an LLC can be complex: LLCs have the advantage of being simpler and more cost effective to set up and maintain than corporations and other complex entities. However, it does still involve a level of complexity that does not come with simply conducting your crypto activities in your own name. You will probably need to hire an expert attorney to help you with the incorporation process, and it will certainly require an investment of your time.
- Setting up an LLC can be expensive: The cost of setting up an LLC is largely dependant on the country and state in which you decide to incorporate. In some cases, the initial and maintenance fees are quite affordable (e.g., Delaware, Wyoming, offshore jurisdictions in the Caribbean, etc.), but in other jurisdictions you may have to pay a hefty fee (e.g., In California, the annual fees alone for an LLC are up to $800).
- It may be difficult to dissolve the LLC: One potential issue with establishing an LLC for your crypto trading is that it involves a greater commitment. Fully dissolving an LLC can be a rather complex process (although it is far easier than unwinding a corporation) and will involve hiring an attorney. This becomes a downside if you suddenly decide that you no longer want to trade crypto anymore.
What Else You Should Consider
In addition to the above considerations as to the relative advantages and disadvantages of setting up an LLC for crypto trading, you need to understand and familiarise yourself with the following issues before deciding whether to take the step of incorporating:
- The actual process of how to practically set up an LLC in your jurisdiction of choice. The exact steps differ in each jurisdiction, but are generally quite similar. It is beyond the scope of this article to go over how to form an LLC but there are plenty of valuable resources online. You should definitely enlist the help of an expert to guide you through the process.
- The scale of your crypto trading activities, which will ultimately determine whether it is worth your while to set up a separate legal entity like an LLC specifically for the purpose of trading/investing in crypto.
- Insurance and other expenses that you will need to incur while maintaining your LLC, and whether these can be offset against your gains for tax purposes (in most cases they can for LLCs).
- How profitable you can realistically expect to be. This too will impact on your decision about whether to form a dedicated company purely for your crypto activities. Cryptocurrency has a high growth potential, but there is also a lot of uncertainty involved, so you need to be prepared for all possible outcomes.
It is clear that using a separate legal entity like an LLC for crypto trading can provide a number of important benefits, and help avoid some of the shortcomings and dangers of trading crypto in your own personal capacity.
That being said, it is not necessarily the best or only option for everyone. It is important to have a full understanding of your unique personal circumstances and expectations, and therefore whether using a corporate entity like an LLC is indeed the best option for you.
Even if you do decide to setup an LLC for crypto trading, you need to make important decisions about where you will incorporate, and how it will be structured. For these practical decisions, there is no replacement for an expert who can help tailor a strategy to best fit your situation and guide you through the process each step of the way.