MicroStrategy tax evasion case is going to court soon, did Michael Saylor really save taxes for the company by selling Bitcoin?

In August last year, Michael Saylor, the founder of the US software company MicroStrategy, was sued by the Attorney General of the District of Columbia, where Washington D.C. is located, for allegedly not paying any income tax despite residing in the area for over 10 years. MicroStrategy was also accused of conspiring to help evade taxes. The court recently announced that the final verdict will be delivered on March 10. Did MicroStrategy's clever tax-saving method of selling Bitcoin work last year? Let's unravel the details and analyze for you!

Changing Address to Evade Washington DC Income Tax

According to previous reports, Washington DC Attorney General Karl A. Racine sued the billionaire CEO of a tech company last August, alleging that he had lived in the district for over ten years but never paid Washington DC income tax, thus accusing him of tax fraud. The lawsuit also targeted MicroStrategy, accusing the company of aiding him in tax evasion. The reported tax amount exceeds $25 million, and if convicted, he will be required to pay back taxes, triple damages, civil fines, and other expenses.

Saylor and MicroStrategy filed a lawsuit on October 26 of the same year. The court ruled on February 28, 2023, with a hearing scheduled for March 10.

Selling Bitcoin for Tax Optimization

MicroStrategy holds the most Bitcoin among publicly traded companies. On December 22 of last year, they sold 704 Bitcoins for approximately $11.8 million in cash, with an average price of $16,776. Two days later, they bought 810 Bitcoins for around $13.6 million, at an average price of $16,845. This selling low and buying high behavior has left many puzzled. In their filings, MicroStrategy described their attempt to offset the losses from selling Bitcoin against previous capital gains, potentially qualifying for tax deductions if federal tax laws allow for such gains and losses deductions.

Founder Michael Saylor mentioned in a CNBC interview in February that the operations at that time resulted in approximately $34 million in tax losses, which could offset corresponding taxable gains.

According to financial information disclosed by MicroStrategy in public filings, the average cost per Bitcoin purchased was as high as $65,767. This aligns with the figures mentioned by Saylor in the interview and matches our calculated actual losses.

Note: The financial report states: "In the fourth quarter of 2022, MicroStrategy sold approximately 704 bitcoins having an original cost basis of $46.3 million and cumulative digital asset impairment losses of $35.4 million, resulting in a carrying value of $10.9 million at the time of sale. The approximately 704 bitcoins were sold for cash proceeds of $11.8 million, net of fees and expenses, resulting in gains on sale of $0.9 million."

Comparing the Bitcoin price chart, one can only say it was bought at the ceiling!

Tax Optimization Expert Hits a Roadblock?

According to a previous CoinDesk report, Saylor resides in a penthouse in Washington, while masquerading as a resident of Florida or Virginia, where MicroStrategy's headquarters are located, purchasing property and registering to vote in those states. However, he spends over 183 days a year in Washington DC, a basic requirement to become a "domiciliary."

Apart from paying federal taxes, U.S. citizens who qualify as residents according to each state's definition and have income sourced from that state must file state income taxes in their resident state. With significant variations in tax rates across different states, according to the latest data from the Tax Foundation, Washington DC has a tax rate as high as 10.75%, while Florida has none. It's no wonder the boss Saylor is trying to avoid high income tax rates by changing his residential address.

Can MicroStrategy's Bitcoin Sales be Tax-Deductible?

Can MicroStrategy really offset taxes by selling and repurchasing Bitcoin within two days? Doesn't the U.S. have Wash Sales rules to prevent investors from tax gaming?

Wash Sales refer to converting unrealized capital losses into realized losses to benefit from tax exemptions in the current year, hoping that the securities repurchased later will appreciate and generate capital gains in the future, which would then be taxable in future years. According to the IRS, when selling at a loss or disposing of stock or securities, including contracts or options to buy or sell stock or securities, and purchasing substantially identical stock or securities within 30 days before or after the sale or disposal, the loss cannot be deducted. However, MicroStrategy might be exploiting the fact that Bitcoin is not categorized as a security to circumvent this rule.

Based on the compiled data on MicroStrategy's previous Bitcoin purchases, it's hard to imagine a scenario where the cost per Bitcoin is $65,767. Could they be disregarding the first-in, first-out or average cost methods for calculating gains and losses in trades? Did MicroStrategy meticulously select 704 "high-priced" Bitcoins to serve as the cost basis?

Is MicroStrategy and Michael Saylor truly tax optimization experts? We may need to wait for further rulings from U.S. courts and the IRS to find out!