MicroStrategy, known for its corporate ownership of bitcoins, is facing new risks that could force the company to sell its cryptocurrency. Recent data indicates that changes in tax legislation may impact the corporation's financial obligations.
Unexpected Tax Liabilities
MicroStrategy purchased its bitcoins for approximately $42.4 billion, but their current value exceeds $66.67 billion. A change in accounting rules (ASU 2023-08) requires the company to account for bitcoins at current market prices. This could result in a minimum 15% tax on 'paper gains' starting in 2026, leading to potential multibillion-dollar tax liabilities, even if the company does not sell a single bitcoin.
Potential Bitcoin Sale for Tax Payment
In its recent SEC filing (Form 8-K), MicroStrategy warns that it may need to sell bitcoins or borrow money to cover tax expenses. It is noted that the company's software business alone will not generate sufficient cash flow to meet tax and other expenses.
Storage Risks and Cash Flow
In addition to tax risks, MicroStrategy has $8.2 billion in debt and $3.4 billion in preferred stock, resulting in over $350 million in annual interest and dividend payments. In the event of bankruptcy of the custodian holding their bitcoins, the company could lose access to its assets. Furthermore, their software business is not generating enough funds to meet obligations.
The situation with MicroStrategy illustrates that corporate ownership of bitcoins is fraught with several risks, including unforeseen taxes and pressure from debts, which may prompt companies to reconsider their strategies and potentially liquidate assets.
