What are the tax implications of holding (and potentially later selling) this large BTC position?
Short answer:
For a U.S.‑public corporation like Empery Digital Inc., Bitcoin (BTC) is treated as property for tax purposes. The company does not incur any tax merely for holding the 3,913 BTC, but every disposal (sale, exchange, or even certain “exchange‑for‑cash” events) triggers a taxable event. The tax consequence is a capital gain or loss calculated as the difference between the sale price and the company’s cost basis (≈ $117,629 per BTC in this case). The gain or loss is reported on the corporate tax return (Form 1120) and is taxed at the corporate income‑tax rate (currently 21 % at the federal level) plus any applicable state franchise or income taxes. Holding the crypto for more than one year does not change the rate (corporate capital‑gain rates are the same as ordinary‑income rates), but the holding period still matters for state tax treatment, for capital‑loss carry‑forward rules, and for the possibility of qualified small‑business stock (QSBS) or other special tax provisions (which in this case do not apply).
Below is a comprehensive overview of the tax picture for a company of this size and the key considerations that should be on Empery’s (and its shareholders’) radar.
1. How the IRS treats Bitcoin for a corporation
| IRS Treatment | What it means for Empery | Key Reference |
|---|---|---|
| Property (not currency) | BTC is a capital asset under § 1221 of the Internal Revenue Code (IRC). | IRS Notice 2014‑21 |
| Basis = purchase price | The cost basis is the amount paid to acquire each BTC (here $117,629 per BTC). | IRC § 1012 |
| Recognition on disposition | A sale, exchange, or “constructive sale” (e.g., a swap that is effectively a sale) creates a taxable event. | IRS Rev. Proc. 2018‑30 |
| Capital‑gain vs. ordinary income | For corporations, capital gains are included in taxable income and taxed at the corporate tax rate (21 % federal). The long‑term vs short‑term distinction does not affect the rate, but it does affect loss‑carryforward rules. | IRC §§ 1221‑1222; 2017 Tax Cuts and Jobs Act (TCJA) |
| Reporting | Gains/losses are reported on Form 1120, Schedule D (or Form 8949 if the corporation elects to file as a “tax‑payer”). | IRS Form 1120, Instructions |
2. Tax‑able events and what triggers them
| Event | Tax consequence | How the amount is calculated |
|---|---|---|
| Sale for cash | Capital gain/loss = Sale price – cost basis | Example: if BTC sells at $30 k → loss of ≈ $87 k per BTC. |
| Exchange for another crypto | Treated as a sale of the first crypto (gain/loss) and purchase of the second at its fair market value (new basis). | Must mark each trade at fair market value (FMV) on the exchange date. |
| Use for purchase of goods/services | Treated as a sale at FMV, generating a gain/loss. | |
| Transfer to a related party for no consideration | Constructive sale; same calculation as a sale for FMV. | |
| Loss‑generating disposal | Recognized loss can offset other capital gains. Excess loss (up to $3,000 for individuals; for corporations, net capital losses can be carried forward indefinitely (but limited to 3 % of taxable income if the corporation has a net operating loss). | IRS § 165(e) |
| Holding without disposal | No tax – just an increase in the asset’s market value; not recognized until a taxable event occurs. | |
| “Mark‑to‑market” election (Section 475) | If Empery elects § 475(e) (mark‑to‑market) for the year, gains/losses are recognized annually regardless of disposals. Most corporations do not use this for long‑term holdings because it turns unrealized gains into taxable income. | |
| Corporate restructuring (e.g., spin‑off) | May trigger a tax‑free reorganization if the conditions of § 368 are met, but the BTC basis would carry over. |
3. Federal corporate tax rate
- Flat 21 % on all taxable income (including capital gains) after the 2017 Tax Cuts and Jobs Act.
- No separate long‑term vs short‑term rate for corporations—both are taxed at the same 21 % rate.
- The effective rate can be lower after net operating losses (NOLs) or other deductions.
Example:
If Empery sells 1,000 BTC at $35 000 each:
- Sale proceeds = $35 million
- Cost basis = 1,000 × $117,629 = $117.6 million
- Loss = $82.6 million (deductible).
If the company sells at $200 000 each:
- Gain = $82.4 million → tax ≈ $17.3 million at 21 % (plus state taxes).
4. State tax considerations
| State | Corporate Tax / Franchise Tax | Bitcoin‑specific rules |
|---|---|---|
| Texas (where the announcement originates) | Texas imposes a franchise tax based on net taxable capital, but no state income tax. BTC is treated as an asset for the franchise tax calculation. | The franchise tax is a flat 0.75 % (for most entities) on the “margin” (net revenue) – not directly on capital gains, but the gain will increase the company's net assets, potentially raising the franchise‑tax base. |
| Other states (where Empery might have nexus) | Most states levy a corporate income tax (rates from ~4 % to 12 %). Some treat crypto gains as ordinary income. | Most states follow the federal treatment, so the 21 % federal rate plus state rates apply. |
| International | If Empery holds any BTC in foreign wallets/ custodians, foreign‑asset reporting (FinCEN, Form 8938) and possibly foreign‑tax‑credit (if foreign tax is paid) could be required. |
Practical take‑aways for a Texas‑headquartered public corporation:
- No state income tax means the only direct tax is the 21 % federal corporate rate (plus the Texas franchise tax, which is calculated on a margin base, not on the capital gain itself).
- The franchise tax does not distinguish between capital gains and ordinary income; it’s based on net revenue or an alternative calculation method (margin, $1 M exemption, etc.).
- Potential tax‑saving opportunity: If the company is able to use a net operating loss carryforward from previous years, the gain can be offset, reducing the overall tax bite.
5. Accounting & reporting requirements
| Requirement | What Empery must do |
|---|---|
| Initial cost‑basis record‑keeping | Track each acquisition (date, amount, purchase price, transaction fees). The aggregate cost basis of $460 million must be retained. |
| Annual reporting | Include the BTC holding as a non‑current asset under ASC 350 (intangible assets) or ASC 985 (if treated as intangible). For tax, the same cost basis is used for capital‑gain calculations. |
| Form 8949/ Schedule D on Form 1120 (or Form 1120‑P for a partnership) for each sale. | |
| Form 1042 (if the BTC is transferred to a foreign entity) for withholding. | |
| Form 8938 & FinCEN reporting for holdings >$50 k (if any U.S. persons hold the shares) – this is a personal filing for shareholders, not the corporation, but may affect public‑company disclosure. | |
| Audit trail | Keep blockchain transaction records, exchange statements, and any “price‑per‑coin” data for each disposition. IRS can request “fair‑market‑value” documentation at the time of each sale. |
| Tax‑loss harvesting | If the BTC value drops significantly, consider selling a portion to generate a capital loss that can offset other gains (or carry forward). |
| Audit risk | The IRS has been focusing on cryptocurrency compliance; keep detailed records to avoid “understatement” penalties (up to 20 % of the tax due). |
6. Special tax considerations for a large position
Capital‑loss carryovers – If Empery sells at a loss, the loss can offset future capital gains (including gains from non‑crypto assets) without limit. Unused loss can be carried forward indefinitely, subject to a 3 % of taxable income limitation on corporate net operating loss (NOL) carryovers (but not for capital losses—those can offset unlimited capital gains).
Potential “tax‑free” re‑organization – If Empery ever spins off a subsidiary that holds the BTC, a Section 351 or Section 368 transaction can be structured to transfer the assets tax‑free, preserving the basis and deferring gain.
Alternative minimum tax (AMT) – The corporate AMT was repealed for 2018‑2025, but state-level AMTs (e.g., California) can apply.
Section 1202 (QSBS) – Not applicable because BTC is not “qualified small‑business stock”.
Potential “deduction” under IRC 280A – Not relevant; only real‑property use‑related deductions exist.
7. Planning strategies
| Strategy | When it helps | How to implement |
|---|---|---|
| Long‑term holding | If Empery expects BTC price to rise and wants to defer tax until a sale; the company can defer taxes indefinitely. | Keep BTC on the balance sheet; no tax until sale. |
| Staggered sales | To smooth out tax impact and avoid large one‑year spikes of taxable income. | Sell portions over several years; each portion creates its own gain/loss. |
| Tax‑loss harvesting | If price drops substantially, selling a portion creates a capital loss that can offset other corporate gains. | Sell a portion, realize loss, re‑buy after 30‑day “wash‑sale” period (wash‑sale rules don’t apply to corporations, but the market‑risk‑loss‑recovery timing may be relevant). |
| Mark‑to‑market election (Section 475) | If Empery wants to recognize unrealized gains/losses annually (e.g., to use existing NOLs). | File a Section 475 election with the IRS before the start of the tax year. |
| Corporate‑level “deduction” | Use any losses to offset other corporate income. | Ensure proper allocation of basis in the corporate tax return; use carry‑forward if necessary. |
| Franchise‑tax planning | Texas franchise tax is based on “margin”; the higher the net revenue, the higher the tax. By reducing taxable income (through capital losses) you lower the “margin” base. | Align asset sales with other high‑expense years; use the “cost of goods sold” (COGS) method if it gives a lower margin. |
8. Example calculations (illustrative, not a forecast)
| Scenario | BTC price at sale | Sale proceeds | Cost basis (average) | Gain (loss) | Federal tax (21 %) | Texas franchise effect |
|---|---|---|---|---|---|---|
| Strong upside (BTC = $250,000) | 1,000 BTC | $250 M | $117.6 M | $132.4 M | $27.8 M | Larger net income → higher franchise‑tax base, but no direct state tax on the gain. |
| Sharp decline (BTC = $30,000) | 1,000 BTC | $30 M | $117.6 M | –$87.6 M | Loss can offset other gains, or carry forward; no franchise‑tax impact if loss reduces net income. | |
| Moderate gain (BTC = $150,000) | 1,000 BTC | $150 M | $117.6 M | +$32.4 M | $6.8 M | Increases franchise‑tax base modestly. |
Note: The actual tax will also include any transaction fees, exchange fees, and state-level franchise tax calculations. The above is a simplified illustration.
9. Bottom line for Empery Digital
- No tax while just holding – The 3,913 BTC are a balance‑sheet asset with a $460 M cost basis.
- Taxable event = sale (or exchange, use, etc.) – Gains are taxed at 21 % federal corporate rate plus Texas franchise tax on net income.
- Record‑keeping is essential – Detailed transaction logs and FMV at each disposition must be preserved for audit.
- Strategic timing – Staggered sales, loss‑harvesting, and possibly a § 475 election are the primary tools to manage the tax hit.
- State tax – Texas has no corporate income tax, so the primary tax impact is the federal corporate rate plus the franchise‑tax “margin”.
Recommendation:
- Maintain an up‑to‑date cost‑basis ledger for every BTC block purchased (including the most recent 110‑BTC addition).
- Model multiple sale scenarios (price‑point, volume, timing) to understand the tax impact at the 21 % rate and the resulting franchise‑tax exposure.
- Consider a tax‑advisor or CPA with crypto expertise to assess whether a § 475 election, loss‑carryforward planning, or a strategic “partial‑sale” schedule best aligns with Empery’s broader financial and capital‑allocation strategies.
Note: This analysis assumes U.S. federal and Texas state tax rules as of 2025. Changes to the corporate tax rate or state franchise‑tax rules could affect the conclusions. Always consult a qualified tax professional for company‑specific advice.