Tax attorney breaks down the MicroStrategy Bitcoin sale

MicroStrategy’s recent sale of a portion of its Bitcoin treasury holdings puts cryptocurrency tax-loss harvesting into the spotlight.

Business intelligence firm MicroStrategy made headlines ahead of New Year’s Eve as the sale of a portion of its Bitcoin (BTC) holdings drew the attention of industry experts and critics.

A regulatory filing with the United States Securities and Exchange Commission (SEC) on Dec. 28 detailed the first time the firm sold some of its BTC since its high-profile adoption of the preeminent cryptocurrency as its primary treasury asset.

MicroStrategy made waves in the industry in 2021 as it began amassing significant holdings of BTC, with founder Michael Saylor touting the asset as a superior store of value to fiat currency as a primary reason for the move.

Given Saylor’s role as a staunch Bitcoin proponent over the past two years, MicroStrategy’s decision to sell some of its BTC drew attention across the industry. However, the company’s SEC filing outlines clear intent to generate a tax benefit.

MicroStrategy’s subsidiary MacroStrategy bought 2,395 BTC for approximately $42.8 million between Nov. 1 and Dec. 21 at an average price of $17,871 per BTC. It then sold 704 Bitcoins on Dec. 22 at an average price of $16,776 per Bitcoin for $11.8 million, highlighting its intent to reduce its tax bill:

“MicroStrategy plans to carry back the capital losses resulting from this transaction against previous capital gains, to the extent such carrybacks are available under the federal income tax laws currently in effect, which may generate a tax benefit.”

Cointelegraph reached out to international tax attorney and CPA Selva Ozelli to unpack MicroStrategy’s Bitcoin sale and the reasoning behind it. As she explains, selling cryptocurrencies for a profit in America would require the payment of capital gains tax:

“Some investors choose to reduce their capital gains in a given tax year by selling some of their digital assets at a loss. This is called tax-loss harvesting.”

Ozelli said that the practice is common for individuals in the cryptocurrency space, given that assets like BTC are treated as property by the Internal Revenue Service (IRS) and subject to capital gains and losses rules:

“Furthermore, the wash sale rule, which prohibits selling securities at a loss and reacquiring them within 30 days does not apply. Because crypto is not a security, there is no crypto-specific wash sale rule.”

MicroStrategy made use of this exception, reacquiring 810 BTC for approximately $13.6 million in cash just two days after realizing a loss on the sale of a portion of its holdings.

Ozelli highlighted the volatility of cryptocurrency market prices as an opportunity for retail and institutional investors to realize and harvest capital losses. The challenge lies in identifying assets that present the greatest opportunity for tax savings:

“The difficult part for investors is identifying which of the digital assets in their portfolio have the highest cost basis (original purchase price) when compared to the current market price.”

Nonfungible tokens (NFTs) also present another avenue to reduce tax liabilities. Renowned DJ Steve Aoki has been selling a variety of NFTs on OpenSea, with his activity publicly viewable on his verified profile.

Reports speculate that Aoki may have been looking to carry out tax-loss harvesting. Cointelegraph has reached out to the DJ’s publicist to ascertain the reason for the sale of hundreds of NFTs from his extensive collection.