Thread by @mulligan

If you run a business that generates revenue in crypto, please read this. There's a critically important detail to be aware of (at least in the US).

It covers:
• Whether to hold income in ETH or USD/C
• Bookkeeping basics
• Basic tax info

Read on if interested... (boring 🧵)

🚨🚨 This is not intended to replace advice from your tax advisor. Please talk to your CPA before making any decisions. 🚨🚨

In the US:
• When you make money from a job it's Ordinary Income.
• When you make/lose money from an investment, it's a Capital Gain/Loss

When someone buys your .25Ξ product, you immediately are taxed on that Ordinary Income for the USD value of the ETH at the time of sale. (let's say ETH is $2000, so that's $500 income).

To keep things simple, let's say you're taxed 50%, so you owe $250 to the government.

Now, let's say you're an ETH bull and want to hold the income in ETH. But, there's a dip and ETH drops to $1000.

You're $500 in income is now worth $250, which is what you owed the government.

But can't you offset the income with the loss?

No.

The $500 of income is a different class of income/loss than the $250 loss of value.

You would still owe taxes on $500 of ordinary income.

And you would have a $250 capital loss.

These do not offset each other.

The nightmare scenario is ETH dropping more than your tax bill, and you end up owing more money than you have.

Sure, you'd have a large capital loss, but you'd still need to pay taxes on the ordinary income. Most businesses wont have big capital gains (at least at first).

Q: So, what do I do for PREMINT?

Every day, we convert all ETH to USDC. This means there's a tiny capital gain/loss if ETH changes, but it never puts us in a bad tax position.

Q: What if ETH rips?

We definitely will miss out on big capital gains if ETH runs to $10k. But we are a software business, not an investment firm.

If you are an ETH bull, take money out of the business and invest it yourself, personally. It's much cleaner that way.

Q: Should you keep it in USD or USDC?

This is totally up to you. We tend to keep a lot in USDC and then convert to USD when we need to pay taxes / operating expenses.

You just need to make sure it's easy to convert/withdraw when your business need it.

Q: What about bookkeeping?

It's a huge PITA. You need a journal entry for the USD value of the ETH at time of income, and another journal entry for the difference in value of the ETH when you convert it to USDC.

You'll also need an entry for USDC → USD but that's simple.

Q: What about DAO treasuries?

No idea. To be honest, they seem like a tax nightmare, but I'm sure there's a clean way to do it.

Q: It's crypto, can't I just not pay taxes?

This obviously isn't the path we chose to take. We run PREMINT like a regular business, paying people in fiat, having a normal bank account, etc..

Taxes are very painful, but I don't lose any sleep over worrying about a future audit.

Q: What about business expenses?

Legitimate business expenses (payroll, operating expenses, etc...) will offset all income. So, if you plan to spend all the money you make, you dont need to worry about a lot of this. Just make sure you can afford to pay your expenses.

🚨🚨 Again, this is not financial advice and you should talk to your CPA before making any decisions.

My goal is to make sure you're considering your tax liability a bit so you dont end up bankrupting your business unintentionally.

Full thread:

https://twitter.com/mulligan/status/1559602900292104192