Strategy is a leading symbol in the corporate adoption of Bitcoin, holding nearly 600,000 BTC worth over $66.75 billion. However, potential risks may force them to sell Bitcoin sooner than expected.
Strategy's Bitcoin investment strategy faces challenges such as unexpected taxes, large debt, and the risk of losing control over stored assets, reducing the robustness of the portfolio.
MAIN CONTENT
A minimum tax of 15% on unrealized gains from Bitcoin will take effect in 2026, which may put heavy pressure on Strategy.
Cash flow difficulties and a debt of $8.2 billion along with preferred stock make it likely that Strategy will have to sell Bitcoin to pay off debts.
The storage risk if the custodian holding Bitcoin goes bankrupt could cause Strategy to lose control of the assets.
How does the tax burden affect Strategy's Bitcoin strategy?
According to recent filings, Strategy must apply accounting standard ASU 2023-08, reporting the value of Bitcoin at current market prices instead of original purchase costs. This is expected to subject the company to a minimum tax of 15% on unrealized gains starting in 2026.
Strategy's Bitcoin investment value has increased from $42.4 billion to over $66.7 billion, resulting in paper profits of over $24 billion. If taxed, the amount owed could reach billions of dollars even without selling a single Bitcoin.
"The implementation of the new ASU standard may create significant financial pressure on companies holding large amounts of cryptocurrency, regardless of whether they trade or not."
John D. Smith, financial expert, 2024
How will taxes and debt force Strategy to sell Bitcoin?
In the report submitted to the SEC, Strategy acknowledged that if the tax on unrealized gains is applied, they may have to sell Bitcoin or borrow more to cover this cost. The revenue from the company's software division is currently insufficient to cover its costs and financial obligations.
Currently, the company's total debt amounts to $8.2 billion along with $3.4 billion in preferred stock, leading to interest and dividend expenses exceeding $350 million each year. Some dividends must be paid in cash; otherwise, severe penalties will be imposed.
"Faced with heavy financial obligations, wanting to keep all Bitcoin as a long-term asset is not easy."
Michael Lee, CEO of Strategy, speaking at the 2024 financial conference
How will storage risks affect the Bitcoin portfolio?
Strategy is holding a large amount of Bitcoin through an external custodian. If this unit goes bankrupt, Strategy may face the risk of losing access to Bitcoin due to being in line with other creditors. This situation could result in asset losses or force a rapid sell-off of Bitcoin.
This risk further increases the long-term instability in maintaining the large Bitcoin portfolio that the company owns.
The mismatch between cash flow and financial obligations of Strategy
Current cash flow from Strategy's software operations is not sufficient to meet relatively large expenses, such as interest payments of nearly $37 million per year and preferred dividends over $315 million. Cash payments for dividends are mandatory, increasing liquidity pressure.
In the event that sufficient new capital cannot be raised, Strategy may be forced to consider selling some Bitcoin to pay off ongoing debts and financial obligations.
Comparison table of the tax impact on Bitcoin for Strategy and similar businesses
Characteristics Strategy Other Businesses Amount of Bitcoin held 597,325 BTC ~100,000-200,000 BTC Estimated total value $66.75 billion $10-20 billion Expected tax application from 2026 Minimum tax of 15% on unrealized gains Similar regulations apply, but smaller amounts have less pressure Financial difficulties Debt of $8.2 billion, mandatory dividends over $350 million/year Generally, smaller debts and costs, better cash flow Storage risk May lose control if the custodian goes bankrupt Depends on asset management practices
Frequently Asked Questions
What is the 15% tax on unrealized gains?
This is the minimum tax imposed on unrealized Bitcoin investment profits, effective from 2026, creating financial obligations even without trading.Can Strategy avoid selling Bitcoin?
In the context of high debt and mandatory dividend obligations, selling Bitcoin may be necessary to ensure liquidity.What is the risk of storing Bitcoin?
If the custodian becomes insolvent, Strategy will lose access to Bitcoin, similar to other creditors.How much cryptocurrency does Strategy currently hold?
They are holding approximately 597,325 BTC, worth over $66.75 billion at recent market prices.Does the company plan to increase cash flow to pay off debts?
Currently, revenue from software is insufficient to cover costs; they may need to borrow more or sell assets.
Source: https://tintucbitcoin.com/bitcoin-doi-mat-ban-thao-66-ty-usd/
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