EMPD

What are the tax implications and potential write‑offs associated with the new BTC acquisition?

Created August 06, 2025 at 07:28 PM

TL;DR

- Buying the 87.62 BTC does not create a current tax bill – it simply establishes a new cost‑basis for those coins.

- The company’s tax reporting will treat the BTC as a capital‑property asset. The basis for the new coins is the $10 MM purchase price (≈ $113,900 per BTC). The aggregate basis for the whole 4,000.85 BTC pool is now about $470 MM (≈ $117,552 per BTC).

- The only way the acquisition can generate a tax benefit (a write‑off) is when the coins are later disposed of, gifted, or become worthless. At that point the realized loss can be used to offset other capital gains (and, in limited cases, ordinary income) on the company’s tax return.

Below is a step‑by‑step breakdown of the relevant U.S. tax consequences and the possible write‑off opportunities that stem from this transaction.

1. How the IRS Views Bitcoin (and other virtual currencies)

IRS Position	Practical consequence
Property, not “currency.”	Each BTC is a separate capital‑property asset. Gains/losses are recognized only on a “sale” or other disposition (e.g., exchange, transfer, donation, or when the asset is deemed worthless).
Section 1234 (Capital Asset) treatment	For a corporation, the default is capital‑gain/loss treatment. Gains are taxed at the corporate rate (currently 21 %). Losses are capital losses first, but can be treated as ordinary losses if the asset is “worthless” under § 165(g).
No depreciation or amortization	Because BTC is not a depreciable tangible asset and is not used in a trade‑or‑business‑like “equipment” context, you cannot claim § 179, § 167, or § 197 deductions for the coins themselves.
Basis tracking required	The corporation must keep a separate basis record for each BTC lot (or use a FIFO/LIFO method on a per‑coin basis). The new lot’s basis is the $10 MM purchase price. The aggregate basis for the whole holding is the weighted‑average of all lots (≈ $117,552 per BTC).

Immediate tax impact of the August 6 purchase

No taxable event at the moment of purchase.
The only reporting requirement is to record the acquisition in the corporate books and to disclose the new cost‑basis for future disposals.
No Form 1099‑B or Form 8949 entry is needed now; the transaction will be entered when the BTC are sold, exchanged, or otherwise disposed of.

2. Potential Write‑Offs (Loss Deductions) Arising from the BTC Holding

2.1 Realized Capital Loss on a Sale/Exchange

If Empery Digital later sells any of the 4,000.85 BTC at a price below its cost‑basis, the difference is a realized capital loss:

Example	Calculation
Sell 10 BTC at $100,000 each (total $1 MM)	Basis for those 10 BTC = 10 × $117,552 ≈ $1,175,520. Loss = $1,175,520 – $1,000,000 = $175,520.
Tax treatment	The $175,520 loss is a capital loss that can offset other capital gains the corporation has in the same tax year. If capital losses exceed capital gains, the excess can be carried forward to future years (no limit on the amount that can be carried forward for a corporation).

2. Ordinary Loss if the BTC Becomes Worthless

If the market price of Bitcoin collapses to $0 (or a value so low that the asset is considered “worthless” under § 165(g)), the loss can be treated as an ordinary loss rather than a capital loss, which is more valuable because:

Feature	Capital loss	Ordinary loss
Offsetting other income	Only capital gains	Both capital gains and ordinary income (up to the full amount of the loss)
Carry‑forward	Unlimited, but only against capital gains	Unlimited, can offset any type of income in future years

Result: If BTC is deemed worthless, Empery could deduct the entire $470 MM aggregate basis (or the portion attributable to the specific lot that went worthless) as an ordinary loss, dramatically reducing taxable income.

2. Losses on Transfers to Third Parties (e.g., charitable contributions)

Charitable donation of BTC: If Empery donates BTC to a qualified 501(c)(3) organization, the corporation can claim a charitable contribution deduction equal to the fair market value of the donated BTC on the date of the donation, subject to the usual 10 % of taxable income limitation for corporations.
If the donated BTC’s FMV is below basis, the deduction is limited to the FMV (i.e., you cannot deduct more than the market value). No “loss” is recognized; the deduction is simply the FMV at donation.

2. Transaction‑Cost Deductions

Exchange/transfer fees paid to acquire the 87.62 BTC (e.g., brokerage commissions, network fees) are capitalized into the cost‑basis of the BTC. They are not separately deductible, but they increase the basis, which reduces any future gain or increases any future loss.

2. Net Operating Loss (NOL) Interaction

If the realized loss (capital or ordinary) creates a net operating loss for the year, the corporation can carry the NOL back 2 years (subject to the 2020 Tax Cuts and Jobs Act rules) and carry it forward indefinitely (subject to the 21 % corporate tax rate limitation). This can provide additional tax relief beyond the direct loss deduction.

3. Practical Reporting Steps for Empery Digital

Step	What to do
1. Record the acquisition	Add a new “lot” in the fixed‑asset/crypto ledger: 87.62 BTC @ $113,900 per BTC, total $10 MM. Update the weighted‑average basis for the entire 4,000.85 BTC pool.
2. Track ongoing market values	While unrealized gains/losses are not taxable, maintaining a market‑value snapshot helps management assess when a write‑off might be advantageous.
3. When a disposition occurs	Complete Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses) on the corporate tax return (Form 1120). Use the specific lot’s basis to calculate gain/loss.
4. If BTC becomes worthless	File a Section 165(g) “worthless” asset claim on Form 1120, treating the loss as ordinary. Attach a statement describing the circumstances (e.g., “Bitcoin price fell to $0 on 202X‑XX‑XX”).
5. For charitable donations	File Form 1120, Schedule C (Charitable Contributions) with the FMV of the donated BTC and obtain a receipt from the charity.
6. Maintain documentation	Keep purchase agreements, exchange receipts, blockchain transaction IDs, and any third‑party valuations. The IRS can request this evidence in an audit.

4. Key Take‑aways for Empery Digital

Point	Explanation
No immediate tax on the $10 MM purchase	The transaction is a capital‑property acquisition; tax is triggered only on a later disposition.
Basis matters	The $10 MM purchase price becomes the cost‑basis for the 87.62 BTC. The aggregate basis for the whole holding is now ≈ $117,552 per BTC.
Write‑offs arise only on a later loss	You can only claim a loss (capital or ordinary) when the BTC are sold, exchanged, donated, or become worthless.
Potential for an ordinary loss	If the market price collapses to $0, the loss can be treated as ordinary, allowing it to offset any type of corporate income.
Charitable contributions are a separate deduction	Donating BTC yields a charitable contribution deduction limited to the FMV at donation, not a loss deduction.
Record‑keeping is essential	Accurate lot‑by‑lot tracking will simplify future tax reporting and ensure the company can substantiate any loss or deduction claimed.

Bottom line

Taxable event = later disposition (sale, exchange, donation, or worthlessness).
Write‑off = realized loss (capital loss first; ordinary loss if the asset is deemed worthless).
No current tax liability from the August 6 acquisition, but the company must maintain meticulous basis records to maximize future loss deductions and to be ready for any audit.

If Empery Digital anticipates a market correction or wants to proactively manage tax exposure, it can consider strategic partial sales to realize losses that offset other capital gains, or charitable gifting of BTC when the price is high to lock in a charitable deduction. The most valuable tax benefit will materialize only when the BTC’s fair market value falls below the recorded cost‑basis.