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The Benefits of Using an LLC for Crypto Trading

Cryptocurrency use has continued to increase over the past few years and is, increasingly, being seen as an alternative market for trading. However, liability and tax could pose a significant issue, subsequently, this guide will take a look at why you should be using an LLC for crypto trading.

Liability Shield – Using an LLC for Crypto Trading

Using an LLC for Crypto Trading
Litigation is Becoming Increasingly Common with Cryptocurrency

First, and foremost, a limited liability company (LLC) provides some asset protection benefits. In particular, a properly organized and operated LLC will provide you with protection against personal liability.

This might not seem important to you, given the anonymous nature of the crypto industry, but lawsuits are becoming increasingly common within the sector. In particular, off-market trades and token deal bring with them increased risk of litigation. In particular, US based traders face significant risk from litigation in the event of a token collapse or other irregular market movement.

Subsequently, all business should always be run through a corporate entity that provides personal liability protection to the entrepreneurs behind them. In this case, crypto related operations are no different.

Privacy Protection Benefits

Another significant benefit to using an incorporated entity is the privacy it can provide you. We all know that “doxing” and unauthorized date breaches are relatively common, but this becomes a real risk when trading in cryptocurrency.

Stories of wallet hacking and theft are legion and have continued to increase over the past few years. Subsequently, connecting your personal information with your trading/wallet/exchange is never a good idea and an LLC can help you shield this data from prying eyes.

In particular, the use of a Wyoming LLC means that the personal member data is never available for public search. As long as you use a registered agent to file, and sign, the annual reports then there will be very little data for anyone to dig into.

Do yourself a favor if you value your privacy…use an LLC as the first link in the chain.

Tax Benefits of Using an LLC for Crypto Trading

Tax Preparation! Tax Time! Tax Forms! NOMINATED!!
The IRS is Becoming Increasingly Interested in Crypto Users

It’s probably no surprise to you that governments around the world are broke and looking for ways to increase their revenue take. Subsequently, agencies like the Inland Revenue Service (IRS) are starting to seriously look at crypto income and capital gains (Schedule D on 1040).

Subsequently, there has been a large drive towards reporting and disclosure requirements with even major crypto and bitcoin exchanges being served with information requests from the feared tax collector.

Additionally, the IRS is now treating mined coins as income and requiring tax to be paid on their minting. Crypto trades have also not escaped scrutiny with the agency treating trading gains as a capital gain and requesting that each, individual, transaction be listed in a schedule on your personal annual return. Enter the domestic LLC, which operators within the broader coin industry are now flocking to in an attempt to legitimize and simplify their tax obligations.

The use of an LLC doesn’t allow you to avoid your tax obligations but, in the case of trading gains, allows you to report a single line item, as compared to a huge schedule of transactions.  This can save you time, money, and make your tax compliance easier.

Personal and Business Credibility

The final point is that an LLC can enhance your personal and business credibility in the cryptocurrency sector. As the number of of DeFi operations continues to increase so to does the drive towards normal business practices.

Subsequently, we are seeing quite a bit of increased AML/KYC, credit and risk assessment, negative reputation searches, and all manner of pre-checks being undertaken prior to commencing counterparty relationships.

The use of a formally established LLC can help you stand out from the large number of hobbyists and, potentially, allow you to access trading and off-market deals from exchanges that you might otherwise not have had access to.

Final Words

If you’re an active cryptocurrency trader, then you should be using an LLC to run your business operations through. In short, you are flirting with disaster without having a limited liability structure in place.

Additionally, you can expect the tax compliance factors to continue ramping up in the coming year and, I suspect, compliance will become a very real risk and additional cost. The use of an LLC can, significantly, simplify your tax reporting whilst also allowing the use of professionals (accountants etc) who can undertake the required tax work for you.

You wouldn’t buy and sell risky, real world, assets in your own name…so why do it with bitcoin. Take the time now and setup either a domestic or offshore LLC now.

Steven James

Meet Steven James, an offshore tax advisor splitting his year between Thailand and St. Lucia. With expertise in trust and company structures, he guides clients to financial success. In his spare time, Steven is a passionate writer and researcher, exploring diverse topics with curiosity and dedication.