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MicroStrategy's mysterious 'buy low, sell high' strategy: an attempt to evade tax obligations?

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On December 22, 2022, MicroStrategy sold 704 bitcoins for the first time. How should this move be interpreted?

Source: TheBlock, blockworks

Author: Casey Wagner, Osato Avan-Nomayo

Translation: PANews

On December 28, 2022, former MicroStrategy CEO Michael Saylor announced on social media that the company had increased its holdings by approximately 2,500 bitcoins. As of now, MicroStrategy holds a total of 132,500 bitcoins, with a total purchase amount exceeding $4.03 billion and an average purchase price of approximately $30,397 per BTC.

Why did MicroStrategy buy Bitcoin again?

Michael Saylor can be said to be one of the most outspoken Bitcoin bulls. He previously stated that the decision to buy Bitcoin was because digital assets are the future of finance. Due to MicroStrategy's belief that Bitcoin prices will appreciate over time, they believe that Bitcoin will become an effective hedge against inflation in the long run.

Michael Saylor himself has repeatedly referred to Bitcoin as "digital gold". More importantly, by investing in Bitcoin, MicroStrategy's visibility has greatly increased, transforming it from an "unremarkable" data operation company into a well-known name among cryptocurrency enthusiasts. Currently, it is also the US-listed company with the largest amount of Bitcoin holdings in the world.

However, the "original intention" of their purchase of Bitcoin may not truly be due to recognition of encryption and blockchain technology. Recently, economist Peter Schiff revealed on social media the true reason why Michael Saylor and MicroStrategy invested in Bitcoin. He pointed out that Michael Saylor purchased Bitcoin to save MicroStrategy from liquidation because "the company has no other way out except for leveraged speculation on digital assets."

However, the issues of MicroStrategy company are not limited to this.

What is the significance of the first Bitcoin sale?

Compared to buying 2500 bitcoins, it is particularly noteworthy that MicroStrategy is selling bitcoins for the first time, because Michael Saylor had promised that the company would never sell its holdings of bitcoins.

According to documents disclosed by the US Securities and Exchange Commission on Wednesday, December 28th, as the deadline for "tax-loss harvesting" approaches, MicroStrategy has sold about 704 bitcoins for a price of $11.8 million on December 22nd, 2022. After expenses and costs, MicroStrategy ultimately received revenue of about $16,700 per bitcoin. "Tax-loss harvesting" refers to a strategy in which US companies sell underperforming assets to realize losses and potentially offset gains, but these trades must be completed before the end of each calendar year.

The U.S. Securities and Exchange Commission believes that MicroStrategy plans to deduct the capital loss from this transaction from previous capital gains, as selling Bitcoin at this time may provide tax benefits to the company under current U.S. federal income tax law. Obviously, MicroStrategy's intention in selling Bitcoin for the first time is very clear - they want to benefit in terms of tax obligations.

According to Tynisa Gaines, an accountant at TokenTax, a cryptocurrency tax services company, the US Internal Revenue Service prohibits companies from selling securities at a loss and then repurchasing the same assets at a "substantially identical" price within 30 days. If a company engages in such transactions, it will be considered a "wash sale" by the IRS, and these companies will not only be penalized but also permanently unable to claim tax losses. However, as of now, this rule does not apply to cryptocurrency transactions.

It seems that MicroStrategy has taken advantage of this "rule loophole", because just two days after selling 704 bitcoins on December 24th, the company purchased about 810 bitcoins at a price of $16,845 per coin, with a total value of approximately $13.6 million. Between November 1st and December 21st, the company purchased a total of about 2,395 bitcoins.

MicroStrategy turned to Bitcoin as a hedge against inflation in 2020, but so far, this strategy has proven to be a risky gamble. Due to the prolonged "crypto winter," Bitcoin and many other cryptocurrencies have continued to decline, and MicroStrategy's market performance has almost hit rock bottom.

Even though Michael Saylor has once again revealed that MicroStrategy will launch software applications and solutions supported by the Bitcoin Lightning Network in 2023 to make more contributions to the cryptocurrency ecosystem and restore market confidence, the company's stock price has not recovered since MicroStrategy announced its increased holdings of Bitcoin on Wednesday. Instead, it has fallen by about 2%, and the overall decline in 2022 has even exceeded 75%.

Of course, at this stage, MicroStrategy is unlikely to face liquidation risk. According to the information previously disclosed by Michael Saylor, the company has a regular loan of $205 million, which requires collateral worth $410 million, but it would only be a problem if Bitcoin falls to $3,562, which is unlikely to happen in the short term.

Will MicroStrategy, which holds Bitcoin, attempt to transform in the future?

It is worth mentioning that MicroStrategy seems to be trying to "quietly" transform from a company that sells business intelligence software. In August of this year, MicroStrategy posted information on its official website to recruit full-time Bitcoin Lightning software engineers to build a SaaS platform based on the Lightning Network, providing innovative solutions for enterprises to cope with network security challenges and supporting new e-commerce use cases. Michael Saylor also revealed that he is researching solutions to connect a large number of users to the Bitcoin Lightning Network, including but not limited to Lightning Network enterprise wallets, Lightning Network enterprise servers, and enterprise identity verification services.

As MicroStrategy seeks to expand from conventional software applications to Bitcoin, it can leverage its existing knowledge to provide tools for enterprises in the Bitcoin and Lightning ecosystems, such as online content monetization, enterprise marketing, network paywalls, and internal controls. In addition, MicroStrategy plans to hold Bitcoin events featuring an "Enterprise Lightning" agenda, which will delve deeper into the company's plans to explore and contribute to the ecosystem and drive wider adoption. Michael Saylor revealed in the latest Twitter Spaces event that MicroStrategy has already begun work in this area and hopes to launch something by next year, with expected performance in the first quarter.

Therefore, in the upcoming year of 2023, if MicroStrategy officially announces its transformation into a "Bitcoin" company, please do not be surprised.